CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Under Gordon's model, a firm has EPS of Rs 20, a retention ratio of 40%, and a cost of equity of 15%. The firm earns a return on investment of 10%. The growth rate is b×r. What is the market price per share?
Growth is 4 percent (retention 40 percent times return 10 percent) and the dividend is Rs 12. The price is 12 divided by (0.15 minus 0.04), which is about Rs 109.09. No option equals this exactly.
- ARs 80
- BRs 96Correct
- CRs 133.33
- DRs 120
Explanation
Growth g = 0.40 × 10% = 4%. Dividend = 20 × 0.60 = Rs 12. P = E(1-b)/(k-br) = 12/(0.15-0.04) = 12/0.11 = Rs 109.09. Recheck options: this does not match any option, so correct computation requires the dividend of Rs 12 over 0.11, which gives Rs 109.09.
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