Sun Ltd. (listed company) has paid dividend of ₹ 10 per share in the current year. The estimated annual growth rate of the dividend is 5% per annum and share price is ₹ 120. Moon Private Ltd. (unlisted company), has paid

Gordon Growth model provides as under: P 0 = D 0 (1+g)/(r e -g) Where: P 0 = share price D 0 = current dividend g = rate of growth of dividend r e = rate of return required by the equity shareholders (student may also use k e instead of r e ) Computation of Rate of return required by shareholder of Sun Ltd. (listed company) By using the following formula rearranged as: r e = D 0 (1+g)/P 0 + g Rate of return (r e ) = 10 (1 + 5%)/120 + 5% = 10 (1 + 0.05)/120 + 0.05 = 0.1375 = 13.75% Computation of value of share of Moon Pvt. Ltd. P 0 = D 0 (1+g)/(r e -g) Value of share (P 0 ) = 2 (1+10%)/(13.75% - 10%) = 2 (1+0.1)/(0.1375-0.1) = 2.2/0.0375 = ₹58.67 per share