In case, cost of capital is 10%, EPS ₹ 10, IRR 8% and Retention Ratio is 60%, then the value of equity…
According to Myron Gordon's dividend growth valuation model, P_0 = E(1 - b) / (k_e - b × r). Given EPS (E) = ₹ 10, retention ratio (b) = 60% = 0.60 (so payout ratio 1 - b =…
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In case, cost of capital is 10%, EPS ₹ 10, IRR 8% and Retention Ratio is 60%, then the value of equity share as per Gordon’s Model will be :
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Correct answer D
According to Myron Gordon's dividend growth valuation model, P_0 = E(1 - b) / (k_e - b × r). Given EPS (E) = ₹ 10, retention ratio (b) = 60% = 0.60 (so payout ratio 1 - b = 0.40), cost of capital (k_e) = 10% = 0.10, and IRR (r) = 8% = 0.08, the growth rate g = b × r = 0.60 × 0.08 = 0.048. Thus, P_0 = (10 × 0.40) / (0.10 - 0.048) = 4 / 0.052 = ₹ 76.92 ≈ ₹ 77.
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UGC NET Commerce