Two valuation lenses on one company
Series XXI-B case study · set 2, case 5 of 6 · 5 questions · 2 marks each
Question 1 of 5Case practice
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The equity team studies a hypothetical mature company. Its next annual dividend is expected to be ₹6 per share and thereafter grow at 4% forever. The team’s required equity return is 10%, and it uses the constant-growth dividend model V = D1/(r−g). Current market price is ₹90. Forecast next-year earnings are ₹10 per share, and a selected peer group trades at 11 times comparable forecast earnings. The company has no stated change in capital structure or payout policy. All forecasts are uncertain and the selected peers may differ in risk and growth. The analyst must compare model outputs without treating either valuation as a guaranteed future trading price.
All amounts and contract terms in this case are hypothetical.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
The equity team studies a hypothetical mature company. Its next annual dividend is expected to be ₹6 per share and thereafter grow at 4% forever. The team’s required equity return is 10%, and it uses the constant-growth dividend model V = D1/(r−g). Current market price is ₹90. Forecast next-year earnings are ₹10 per share, and a selected peer group trades at 11 times comparable forecast earnings. The company has no stated change in capital structure or payout policy. All forecasts are uncertain and the selected peers may differ in risk and growth. The analyst must compare model outputs without treating either valuation as a guaranteed future trading price.
All amounts and contract terms in this case are hypothetical.
Q1What value does the dividend model produce under the base assumptions?
Option A. ₹100 per share — Correct answer
Option B. ₹104
Why it is wrong: This grows the already forward-looking dividend again.
Option C. ₹150
Why it is wrong: This divides by growth alone.
Option D. ₹60
Why it is wrong: This divides by the required return without subtracting growth.
Answer: A. V = ₹6/(0.10−0.04) = ₹100. Remember: Use D1, not a second growth adjustment, in the stated constant-growth formula.
Hint, shown before you answer in practice mode: The numerator is already next year’s dividend.
XXIB-S2-C05-Q1mediumnumerical
Q2How far below that model value is the ₹90 market price, as a percentage of model value?
Option A. 11.11%
Why it is wrong: This divides by market price rather than the requested model-value base.
Option B. 4%
Why it is wrong: This is the assumed dividend growth rate.
Option C. 6.67%
Why it is wrong: This is the next dividend divided by market price.
Option D. 10% — Correct answer
Answer: D. (₹100−₹90)/₹100 = 10%. Remember: A percentage discount depends on the reference value chosen.
Hint, shown before you answer in practice mode: Use the denominator specified in the question.
XXIB-S2-C05-Q2easynumerical
Q3What value follows from the peer forward P/E multiple?
Option A. ₹99
Why it is wrong: This applies the multiple to market price expressed incorrectly.
Option B. ₹11
Why it is wrong: This omits the earnings-per-share multiplier.
Option C. ₹110 per share — Correct answer
Option D. ₹100
Why it is wrong: This is the dividend-model output.
Answer: C. ₹10 EPS × 11 = ₹110. Remember: Keep the earnings period consistent between the company and peer multiple.
Hint, shown before you answer in practice mode: Multiply comparable forecast EPS by the selected multiple.
XXIB-S2-C05-Q3easynumerical
Q4If required return rises to 12% while the dividend and growth assumptions stay fixed, what is the new dividend-model value?
Option A. ₹120
Why it is wrong: A higher required return does not increase value with unchanged cash flows.
Option B. ₹100
Why it is wrong: This ignores the increased discount rate.
Option C. ₹75 per share — Correct answer
Option D. ₹50
Why it is wrong: This ignores growth in the denominator.
Answer: C. ₹6/(0.12−0.04) = ₹75. A two-percentage-point required-return change materially changes the model output. Remember: Show valuation sensitivity to uncertain assumptions.
Hint, shown before you answer in practice mode: Only r changes in D1/(r−g).
XXIB-S2-C05-Q4mediumnumerical
Q5What conclusion best fits the two base valuations and the sensitivity result?
Option A. The base models suggest value above ₹90, but the conclusion depends on forecasts, required return and comparability — Correct answer
Option B. The price must soon rise to ₹110
Why it is wrong: A model output does not guarantee a market outcome.
Option C. A ₹100 model value eliminates downside risk
Why it is wrong: The sensitivity test shows a plausible lower model value.
Option D. Two different outputs prove that both models are useless
Why it is wrong: Different valuation methods can reveal different assumptions and sensitivities.
Answer: A. The base dividend and peer models give ₹100 and ₹110, but a higher required return gives ₹75. A responsible view explains the range and its drivers. Remember: Use multiple valuation tools to test assumptions rather than manufacture certainty.
Hint, shown before you answer in practice mode: A valuation is conditional on its assumptions.
XXIB-S2-C05-Q5hardapplication
Meeting a withdrawal during a liquidity shock
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