CA Inter P6 · Chapter 8 · Question 3 of 8
Using Gordon's model, a firm has EPS of ₹ 15, retains 40% of earnings, earns 12% on investments and has a cost of equity of 14%. The price per share (to two decimals) is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) ₹ 97.83
Explanation
g = b x r = 0.40 x 12% = 4.8%. Dividend = E(1 - b) = 15 x 0.60 = ₹ 9. P = E(1 - b) / (Ke - br) = 9 / (0.14 - 0.048) = 9 / 0.092 = ₹ 97.83. Swapping the payout and retention ratios gives ₹ 88.24.
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