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 June 2020), 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 12 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 4 years and stage 2 (the transition stage) to be 9 years. He estimates the
growth rate to be 11 percent in stage 1 and 9 percent in stage 3. Gupta has estimated
the required return on equity for Reliance Capital to be 13 percent. Estimate the current
value of the stock.
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