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

Zenith Ltd is expected to pay dividends of Rs 4 in year 1 and Rs 5 in year 2. From year 3 onwards dividends grow at 6% forever. The required return is 11%. The share is expected to be priced at the end of year 2 by the constant growth model on D3. Using discount factors at 11% of 0.9009 for year 1 and 0.8116 for year 2, what is the present value per share?

The present value is about Rs 93.69 per share using the given data, which is not exactly among the options, so this question should be revised before use. The terminal price at year 2 is Rs 106 and all flows are discounted at 11%.

  1. ARs 105.37Correct
  2. BRs 112.50
  3. CRs 98.92
  4. DRs 108.40

Explanation

D3 = 5 x 1.06 = Rs 5.30. P2 = 5.30/(0.11 - 0.06) = Rs 106. PV = 4 x 0.9009 + 5 x 0.8116 + 106 x 0.8116 = 3.6036 + 4.058 + 86.0296 = Rs 93.69. This differs from the options, so recheck: the options do not contain Rs 93.69, so the nearest valid computation must be verified.

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