Question
Mohini Kapadia is the portfolio manager of an India - based equity fund. He is analyzing the value of Reliance Capital. Gupta has concluded that
Mohini Kapadia is the portfolio manager of an India - based equity fund. He is analyzing the value of Reliance Capital. Gupta has concluded that the DDM is appropriate to value the company. During the past five years (fiscal year ending 31 March 2014 to fiscal year ending 31 March 2019), the company has paid dividends per share of Rs.5.50, 6.50, 7.00, 8.00, and 9.00, respectively. These dividends suggest an average annual growth rate in DPS of just above 13 percent. Gupta has decided to use a three - stage DDM with a linearly declining growth rate in stage 2. He considers reliance capital to be an average growth company, and estimates stage 1 (the growth stage) to be 5 years and stage 2 (the transition stage) to be 10 years. He estimates the growth rate to be 13 percent in stage 1 and 10 percent in stage 3. Gupta has estimated the required return on equity for Reliance Capital to be 16 percent. Estimate the current value of the stock.
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