Question

A company earns Rs. 10 per share at an internal rate of 15%. The firm has a policy of paying 40% of earning as dividends. If the required rate of return is 10%, determine the price of the share under Gorden’s Model.

Answer 1

Under Gordon's Model, the price per share = (Dividend per share x (1 + Required Rate of return)) / (Required Rate of return – Internal Rate of return)

Price per share = (10 x (1 + 10%))/(10% – 15%)

Rs. 8.00

Therefore, the price of the share under Gordon's Model is Rs. 8.00. This rate is determined by calculating the dividend per share at 40% of the earnings, and analysing the difference between the required rate of return and the internal rate of return.