CS Executive · Corporate Accounting and Financial Management · Security Analysis
Sundaram Textiles Ltd. has just paid a dividend of Rs 10 per share. Dividends are expected to grow at 5% per year forever and shareholders require a 15% return. What is the intrinsic value per share?
The intrinsic value is Rs 105. The next dividend is 10 x 1.05 = Rs 10.50, and dividing by the difference between the 15% required return and 5% growth gives 10.50 / 0.10 = Rs 105 per share.
- ARs 100.00
- BRs 105.00Correct
- CRs 110.00
- DRs 70.00
Explanation
D0 = 10, so D1 = 10 x 1.05 = Rs 10.50. P0 = 10.50 / (0.15 - 0.05) = 10.50 / 0.10 = Rs 105. Check: 105 x 0.10 = 10.50. Using D0 directly gives Rs 100, which ignores that the model needs next year's dividend.
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