ABD Limited has provided the following information : Earnings per share = ₹ 25 Dividend per share = ₹ 9 Cost of capital = 12% Internal rate of return (IRR) on investment = 16%. You are required to compute the market pric

Answer 6(b) Given Information: Earnings per share (E) = ₹ 25 Dividend per share (D) = ₹ 9 Cost of capital (Ke) = 12% = 0.12 Internal rate of return (r) = 16% = 0.16 a) Gordon's approach Formula: P0 = D1 / (Ke - g) Where, P0 = Price of equity share D1 = Dividend per share = ₹ 9 Ke = Cost of equity capital = 0.12 g = Growth rate = b * r b = Retention Ratio = (E - D) / E = (₹ 25 - ₹ 9) / ₹ 25 = 16 / 25 = 0.64 r = Internal rate of return = 0.16 g = 0.64 * 0.16 = 0.1024 P0 = ₹ 9 / (0.12 - 0.1024) = ₹ 9 / 0.0176 = ₹ 511.36 b) Walter's Approach Formula: P = D + (r/Ke)(E-D) / Ke Where, P = Market price per share D = Dividend per share = ₹ 9 r = Internal rate of return = 0.16 Ke = Cost of equity capitalization rate = 0.12 E = Earnings per share = ₹ 25 P = ₹ 9 + (0.16/0.12)(₹ 25 - ₹ 9) / 0.12 = ₹ 9 + (1.3333)(₹ 16) / 0.12 = ₹ 9 + ₹ 21.3328 / 0.12 = ₹ 30.3328 / 0.12 = ₹ 252.77