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CA Final · Advanced Financial Management · Business Valuation

Tulsi Retail Ltd has a trailing EPS (E0) of ₹20 and pays out 40% of earnings as dividends. Earnings and dividends are expected to grow at a constant 6% a year indefinitely, and the cost of equity is 14%. Using the constant-growth model, what is the justified trailing P/E-based value of one share?

The justified value is ₹106 per share. With a 40% payout, 6% growth and 14% cost of equity, the trailing P/E is 0.4 × 1.06 divided by 0.08, or 5.3. Multiplying by the trailing EPS of ₹20 gives ₹106.

  1. A₹106.00Correct
  2. B₹100.00
  3. C₹57.14
  4. D₹159.00

Explanation

Justified trailing P/E = payout × (1+g)/(ke − g) = 0.4 × 1.06 / 0.08 = 5.3. Value = 5.3 × 20 = ₹106. Omitting the (1+g) step gives a forward-style 5.0 × 20 = ₹100, which is wrong because the EPS given is trailing. Using retention of 60% instead of payout gives ₹159.

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