CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Using the Gordon model, a company has EPS of ₹20, retention ratio 40%, return on investment r = 15% and cost of equity Ke = 12%. What is the price per share? (b = retention ratio, g = b × r)
The price is ₹200. Growth is retention times return, 0.40 × 15% = 6%. Next dividend is 60% of ₹20 = ₹12. Gordon's price equals dividend divided by (Ke − g), which is 12/0.06 = ₹200.
- A₹200Correct
- B₹160
- C₹133.33
- D₹150
Explanation
g = 0.40 × 15% = 6%. D1 = 20 × 0.60 = ₹12. P = D1/(Ke − g) = 12/(0.12 − 0.06) = 12/0.06 = ₹200. Check: E(1−b)/(Ke − br) = 20×0.6/0.06 = 200. Using Ke alone would give 12/0.12 = ₹100, ignoring growth.
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