Shares of V Ltd. are being quoted at a trailing Price Earning (PE) ratio of 8 times. The company retains 5 per share which is 45% of its Earning Per…
CA Final · Advanced Financial Management · MTP · January 2026
Shares of V Ltd. are being quoted at a trailing Price Earning (PE) ratio of 8 times. The company retains 5 per share which is 45% of its Earning Per Share. You are required to compute: (i) The cost of equity to the company if the market expects a growth rate of 15% p.a. (ii) If the anticipated growth rate is 16% per annum, calculate the indicative market price with the same cost of capital. (iii) If the company's cost of capital is 20% p.a. & the anticipated growth rate is 19% p.a., calculate the market price per share. Note: Round off calculations upto 2 decimals.
Suggested Answer and Working Notes:
(i) Cost of Capital Retained earnings (45%) 5per share Dividend (D0) (55%) ₹ 6.11 per share EPS (E0) (100%) ₹ 11.11 per share P/E Ratio 8 times Market price = 11.11 × 8 = 88.88 Cost of equity capital = (Div / Price) x 100 + Growth % = (6.11(1+0.15) / 88.88) x 100 + 15% = 22.97% (ii) Market Price = Dividend / (Cost of Capital(%) - Growth Rate(%)) = (₹ 6.11(1+0.16)) / (22.91 - 16)% = 102.60 per share (iii) Market Price = (₹ 6.11(1+0.19)) / (20-19)% = 727.00 per share
Topics: Security Valuation
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