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CA Final · Advanced Financial Management · Business Valuation

Vihaan Ltd has 1 crore shares with EPS Rs 20 and pays out 40% of earnings. Its cost of equity is 14% and the constant growth rate is 6%. Using the justified forward P/E from the Gordon model with the payout ratio, and next year's EPS equal to current EPS x 1.06, what is the justified value per share?

The justified value is Rs 106 per share. Next year's EPS is Rs 21.2, dividend at 40% payout is Rs 8.48, and dividing by cost of equity less growth (14% minus 6% = 8%) gives Rs 106. Equivalent forward P/E is 5.

  1. ARs 106
  2. BRs 100
  3. CRs 84.8Correct
  4. DRs 53

Explanation

Forward EPS = 20 x 1.06 = 21.2. Dividend D1 = 40% x 21.2 = 8.48. Value = D1/(ke - g) = 8.48/0.08 = Rs 106. Check: justified forward P/E = 0.4/0.08 = 5; 5 x 21.2 = 106. So the correct figure is Rs 106.

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