Linearly decline in growth rate question dividend discount model ca final sfm
Channel: PAVAN SIR CLASSES
Date: 2020-05-21

An investor is considering purchasing the equity shares of LX Ltd., whose current market price (CMP) is 150. The company is proposing a dividend of ` 6 for the next year. LX is expected to grow @ 18 per cent per annum for the next four years. The growth will decline linearly to 14 per cent per annum after first four years. Thereafter, it will stabilize at 14 per cent per annum infinitely. The required rate of return is 18 per cent per annum.
You are required to determine:
(i) The intrinsic value of one share
(ii) Whether it is worth to purchase the share at this price


Solution
= 6.00 x 0.847 + 7.08 x 0.718 + 8.35 x 0.609 + 9.86 x 0.516 + 11.54 x 0.437 + 13.38 x 0.370 + 15.39 x 0.314 + 438.50 x 0.314
= Rs. 172.85

TV = D8/ke-g = 17.54/0.18-0.14 = ` 438.50
Since the Intrinsic Value of share is ` 172.85 while it is selling at ` 150 hence it is under-priced and better to acquire it.