CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance
Sundaram Textiles Ltd has just reported earnings per share of ₹20 and paid a dividend of ₹12 per share (D0). The firm's return on equity is 15% and its retention policy will stay unchanged. If the required return on equity is 12%, what is the intrinsic value per share under the constant growth dividend model?
The intrinsic value is ₹212. Retention of 40% and ROE of 15% give growth of 6%. The next dividend is 12 × 1.06 = ₹12.72, and dividing by the required return less growth (12% − 6% = 6%) gives ₹212.
- A₹212.00Correct
- B₹200.00
- C₹166.67
- D₹141.33
Explanation
Retention ratio = 1 − 12/20 = 40%, so g = 0.40 × 15% = 6%. D1 = 12 × 1.06 = ₹12.72. P0 = 12.72 / (0.12 − 0.06) = ₹212. ₹200 is wrong because it uses D0 instead of D1.
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