Share of Beta Ltd. is being quoted at a Price-Earning ratio of 10 times. In the coming year the company is expected to retain 10 per share which is…
CA Final · Advanced Financial Management · MTP · May 2024
Share of Beta Ltd. is being quoted at a Price-Earning ratio of 10 times. In the coming year the company is expected to retain 10 per share which is 45% of its Earning Per Share. You are required to evaluate: (i) The cost of equity to the company if the market expects a growth rate of 10% p.a. (ii) If the anticipated growth rate is 12% per annum, calculate the indicative market price with the same cost of capital.
Suggested Answer and Working Notes:
(i) Cost of Capital Retained earnings (45%) 10per share Dividend (55%) ₹ 12.22 per share EPS (100%) ₹ 22.22 per share P/E Ratio 10 times Market price - 22.22 × 10 = 222.20 Cost of equity capital = (Div / Price) × 100 + Growth % = (12.22 / 222.20) × 100 + 10% = 15.50% (ii) Market Price = Dividend / (Cost of Capital(%) - Growth Rate(%)) = 12.22 / (15.50-12.00)% = 349.14 per share
Topics: Security Valuation
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