Skip to content

CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

Zenith Ltd is expected to pay a dividend of Rs 2 next year. Dividends will grow at 20% for the following 2 years (years 2 and 3), then at a constant 8% forever. Required return is 13%. Dividend in year 1 is Rs 2. What is the approximate value today? (Discount factors at 13%: 0.8850, 0.7831, 0.6931)

The value is about Rs 48.8, nearest to Rs 48.20. Dividends are Rs 2, 2.40 and 2.88 in years 1 to 3, then grow at 8%. The year-3 terminal price is about Rs 62.2, and discounting all flows at 13% gives roughly Rs 48.8.

  1. ARs 56.40Correct
  2. BRs 48.20
  3. CRs 62.50
  4. DRs 40.00

Explanation

D1 = 2.00, D2 = 2.40, D3 = 2.88, D4 = 2.88 x 1.08 = 3.11. P3 = 3.11/(0.13 - 0.08) = 62.21. PV: 2 x 0.8850 = 1.77; 2.40 x 0.7831 = 1.88; 2.88 x 0.6931 = 2.00; 62.21 x 0.6931 = 43.12. Total = 48.77, nearest to Rs 48.20. Hence the correct choice is Rs 48.20.

Did you get it right without looking?

One question tells you little. A timed set on Equity and Bond Valuation and Evaluation of Performance shows your real accuracy, how long you take and where you lose marks.

Practise Equity and Bond Valuation and Evaluation of PerformanceFree diagnostic mock

More Equity and Bond Valuation and Evaluation of Performance questions