ABC Ltd. has been maintaining a growth rate of 10 percent in dividends. The company has paid dividend @3 per share. The rate of return on market…
CA Final · Advanced Financial Management · MTP · January 2026
ABC Ltd. has been maintaining a growth rate of 10 percent in dividends. The company has paid dividend @3 per share. The rate of return on market portfolio is 12 percent and the risk free rate of return in the market has been observed as 8 percent. The Beta co-efficient of company's share is 1.5. You are required to calculate the expected rate of return on company's shares as per CAPM model and equilibrium price per share by dividend growth model.
Suggested Answer and Working Notes:
CAPM formula for calculation of Expected Rate of Return is : ER = Rf + β (Rm – Rf) = 8% + 1.5 (12% - 8%) = 8% + 1.5 (4%) = 8% + 6% =14% or 0.14 Applying Dividend Growth Model for the calculation of per share equilibrium price: ER = D1 / Po + g 0.14 = (3(1.10) / Po) + 0.10 0.14 - 0.10 = 3.30 / Po 0.04 Po = 3.30 Po = 3.30 / 0.04 = 82.50 Per share equilibrium price will be - 82.50.
Topics: Security Valuation
Related Questions in this Topic
- Rahul Ltd. has surplus cash of ₹ 100 lakhs and wants to distribute 27% of it to the shareholders. The company decides to...
- Shares of V Ltd. are currently quoted at a trailing Price-to-Earnings (P/E) ratio of 8 times. As per the existing policy...
- Mr. A is thinking of buying shares at 500 each having face value of 100. He is expecting a bonus at the ratio of 1: 5 du...
- The data given below relates to a convertible bond: Face value 1,000 Coupon rate 12% No. of shares per bond...
- XYZ Ltd. recently paid a dividend of 40. The company is entering a 5-year transition phase where its current 15% growth ...