Vista Limited's retained earnings per share for the year ending 31.03.2023 being 40% is 3.60 per share. Company is foreseeing a growth rate of 10%…

CA Intermediate · Financial Management and Strategic Management · PYQS · May 2024
Vista Limited's retained earnings per share for the year ending 31.03.2023 being 40% is 3.60 per share. Company is foreseeing a growth rate of 10% per annum in the next two years. After that the growth rate is expected to stabilize at 8% per annum. Company will maintain its existing pay-out ratio. If the investor's required rate of return is 15%, Calculate the intrinsic value per share as of date using Dividend Discount model.

Suggested Answer and Working Notes:

As per Dividend discount model, the price of share is calculated as follows: Retained earning per share = 3.60 Dividend per share, D 0 = 3.60 40% x 60% = 5.40 P = D 1 (1+K e ) 1 + D 2 (1+K e ) 2 + D 3 (K e -g) x 1 (1+K e ) 2 Where, P = Price per share K e = Required rate of return on equity g = Growth rate P = 5.4x1.1 (1+0.15) + 5.94x1.1 (1+0.15) 2 + 6.534x1.08 (0.15-0.08) x 1 (1+0.15) 2 P = 5.17 + 4.94 + 76.23 = 86.33 Intrinsic value of share is 86.33

Topics: Part-A: Financial Management

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