In case, cost of capital is 10%, EPS Rs. 10, IRR 8% and retention ratio is 60%, then the value of equity share as per Gordon's Model will be
A. Rs. 100
B. Rs. 87
C. Rs. 90
D. Rs. 77
Answer: Option D
Solution (By Examveda Team)
Gordon’s Dividend Capitalization Model is used to calculate the value of an equity share using the formula:P = E(1 – b) / (k – br)
Where:
P = Price of the share (Value of equity share)
E = Earnings per share = Rs. 10
b = Retention ratio = 60% = 0.6
k = Cost of capital = 10% = 0.10
r = Internal rate of return = 8% = 0.08
Substitute the values into the formula:
P = 10(1 – 0.6) / (0.10 – 0.6 × 0.08)
P = 10(0.4) / (0.10 – 0.048)
P = 4 / 0.052
P ≈ Rs. 76.92 ≈ Rs. 77 (rounded)
Therefore, the correct value of the equity share as per Gordon's Model is Rs. 77.
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We’ll use *Gordon’s Growth Model (Dividend Discount Model)* formula:
*P = E(1 − b) / (k − br)*
Where:
- *P* = Price of the share
- *E* = Earnings per share = Rs. 10
- *b* = Retention ratio = 60% = 0.6
- *k* = Cost of capital = 10% = 0.10
- *r* = Return on investment (IRR) = 8% = 0.08
*Step 1: Calculate br = 0.6 × 0.08 = 0.048*
*Step 2: k − br = 0.10 − 0.048 = 0.052*
*Step 3: E(1 − b) = 10 × (1 − 0.6) = 10 × 0.4 = 4*
Now,
*P = 4 / 0.052 ≈ Rs. 76.92 ≈ Rs. 77*
✅ *Correct answer: D. Rs. 77*