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CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

Sundaram Ltd pays a current annual dividend of Rs 6 per share. Dividends are expected to stay constant forever, and shareholders require a return of 12%. What is the intrinsic value per share?

The intrinsic value is Rs 50, because a constant dividend of Rs 6 forever is a perpetuity valued by dividing the dividend by the required return of 12 percent. Rs 6 divided by 0.12 equals Rs 50.

  1. ARs 50Correct
  2. BRs 56
  3. CRs 72
  4. DRs 6

Explanation

For a zero-growth perpetuity, value = D/ke = 6/0.12 = Rs 50. Rs 56 wrongly grows the dividend by 12% (6x1.12/0.12 = 56). Rs 72 multiplies the dividend by the required return instead of dividing.

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