Shares of V Ltd. are currently quoted at a trailing Price-to-Earnings (P/E) ratio of 8 times. As per the existing policy, the company recently…
CA Final · Advanced Financial Management · RTP · November 2026
Shares of V Ltd. are currently quoted at a trailing Price-to-Earnings (P/E) ratio of 8 times. As per the existing policy, the company recently retained ₹5 per share, representing 45% of its Earnings per Share (EPS), for ploughing back into the business. 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:
4. (i) Cost of Capital Retained earnings (45%) ₹ 5 per share Dividend (D 0 ) (55%) ₹ 6.11 per share EPS (E 0 ) (100%) ₹ 11.11 per share P/E Ratio 8 times Market price ₹ 11.11 × 8 = 88.88 Cost of equity capital = (D 0 (1+g) P 0 ) + Growth % = 6.11(1+0.15) 88.88 × 100 + 15% = 22.91% (ii) Market Price = Dividend Cost of Capital(%) - Growth Rate(%) = 6.11(1+0.16) (22.91-16)% = ₹ 102.57 per share (iii) Market Price = 6.11(1+0.19) (20-19)% = ₹ 727.09 per share
Topics: Security Valuation
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