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

Sundaram Textiles Ltd has just paid a dividend of Rs 10 per share. Dividends are expected to grow at 5% a year forever, and the required return on equity is 15%. Using the constant growth model, what is the intrinsic value per share today?

The intrinsic value is Rs 105. The next dividend is Rs 10.50 (Rs 10 grown by 5%), and dividing by the difference between required return and growth, 10%, gives Rs 105. Using the last dividend of Rs 10 would wrongly give Rs 100.

  1. ARs 70.00
  2. BRs 100.00
  3. CRs 105.00Correct
  4. DRs 66.67

Explanation

D1 = 10 x 1.05 = 10.50. Value = D1/(ke - g) = 10.50/(0.15 - 0.05) = Rs 105. Using D0 directly gives Rs 100, which ignores the growth already due in the next dividend.

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