PQR Ltd. is a leading company operating in the coal sector, engaged in the extraction, processing, and distribution of coal for industrial and…

CA Intermediate · Financial Management and Strategic Management · PYQS · January 2026
PQR Ltd. is a leading company operating in the coal sector, engaged in the extraction, processing, and distribution of coal for industrial and energy purposes. The following information is provided by the management of PQR Ltd. Particulars Issued Share Capital 24,00,000 Dividend Paid 10 per Share Growth Rate 20% p.a. in perpetuity Cost of Equity (K e ) 25% You are required to calculate: (i) Using Gordon Model: (a) The current market price of the share. (b) Number of issued shares, if market price per share (MPS) is equal to face value per share. (ii) Using Modigliani and Miller (MM) Hypothesis: (a) The market price of the share at the end of year if dividend is paid. Use the current market price calculated in Gordon model as P 0 . (b) What will be the amount of earnings required for the company so that the MM hypothesis holds true, if the company has made new investments of 5,00,000 during the period and issued 1,000 new equity shares?

Suggested Answer and Working Notes:

(a) (i) (a) P 0 = D 1 / (K e - g) = E 1 (1-b) / (K e - br) D 0 = 10 K e = 25% g = 20% P 0 = 10(1+0.20) / (0.25-0.20) = 12 / 0.05 = 240 (b) Number of Shares = 24,00,000 / 240 = 10,000 shares (ii) (a) As per MM Hypothesis, P 0 = (P 1 + D 1 ) / (1+K e ) 240 = (P 1 + 12) / (1+0.25) P 1 = 288 (b) Calculation of Amount of earning required V f or nP 0 = ((η + Δη)P 1 - I + E) / (1+K e ) Where, V f = Value of firm in the beginning of the period n = Number of shares in the beginning of the period Δη = Number of shares issued to raise the funds required I = Amount required for investment E = Total earnings during the period 24,00,000 = [(10,000 + 1,000) × ₹ 288] -5,00,000 + E / (1+0.25) 30,00,000 = 26,68,000 + E Amount of earnings required (E) = 3,32,000

Topics: Part-A: Financial Management

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