The firm’s average rate of return is 15%, its cost of capital is 10% and earnings per share is ₹ 10. If…
Under Gordon's Dividend Growth Model, P0 = EPS(1 - b) / (k - br), where r = 0.15, k = 0.10, and EPS = ₹ 10. For a 40% payout (b = 0.60), P0 = 4 / (0.10 - 0.09) = ₹ 400; for…
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The firm’s average rate of return is 15%, its cost of capital is 10% and earnings per share is ₹ 10. If the pay-out ratio is 40%, 60% and 90%, the value of share according to Gordon’s model will be
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Correct answer C
Under Gordon's Dividend Growth Model, P0 = EPS(1 - b) / (k - br), where r = 0.15, k = 0.10, and EPS = ₹ 10. For a 40% payout (b = 0.60), P0 = 4 / (0.10 - 0.09) = ₹ 400; for a 60% payout (b = 0.40), P0 = 6 / (0.10 - 0.06) = ₹ 150; and for a 90% payout (b = 0.10), P0 = 9 / (0.10 - 0.015) = 9 / 0.085 = ₹ 105.88.
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UGC NET Management