Question
Q6 A stock of X Co. just gave a dividend of Rs6 per share. Is is expected that dividend will grow by 8.00% over the
Q6 A stock of X Co. just gave a dividend of Rs6 per share. Is is expected that dividend will grow by 8.00% over the next 3 years (0-1, 1-2, 2-3years). Beyond 3 years, X co. will be retaining 50% of the earnings and investments in a project which is expected to return a 10% p.a. (EAR) return on equity(ROE) from the investment. This retention ratio of 50% is going to continue forever there after, and the ROE is also expected to continue at 10% p.a. EAR forever thereafter, Hence , growth rate in dividends beyond three years till perpetuity will be 5% p.a.(EAR). The relevant cost of equity capital is estimated at 10% pa. compounded annually. what is the intrinsic value of the stock of X co.? If the market price per share of the stock is Rs. 100, What should be the investment recommendation be related to stock X(buy or sell) ? (05 Marks)
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