CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance
Suraj Textiles Ltd is expected to pay a dividend of ₹6 per share next year. Dividends are expected to grow at 4% per annum forever. If investors require a return of 12%, what is the intrinsic value per share under the constant growth model?
The intrinsic value is ₹75 per share. Under the constant growth model, value equals next year's dividend divided by the difference between required return and growth rate, so 6 divided by 8% gives ₹75.
- A₹50.00
- B₹75.00Correct
- C₹72.12
- D₹37.50
Explanation
P0 = D1/(ke - g) = 6/(0.12 - 0.04) = 6/0.08 = ₹75. The option ₹50 wrongly divides by 12% alone (6/0.12). The option ₹72.12 wrongly treats 6 as D0 and grows it.. no, that would give higher; it is a miscalculated figure. ₹37.50 uses a 16% denominator by adding g to ke.
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