Gordon Model

Q.1 The following information is available related to the XYZ ltd:

Earnings per share: = 10 Rs. (Constant)

Cost of capital (Ke) = 10%

Find out the market price of the share under different rate of return r, of 8%, 10% and 15% for
different payout ratio of 0%, 40%, 80% and 100%.

Q.2 A company has total investment of 5,00,000 assets and 50,000 outstanding equity shares of
Rs. 10 each. It earns a rate of return of 15% on investment, and has a policy of retaining 50% of
earnings. If the appropriate discount rate for the firm is 10% determine the share price using
Gordon model, if the company has a payout of 80% or 20%.

Q.3. Assuming that rate of return expected by investor is 11% internal rate of return is 12% and
earning per share is 15, calculate the price per share by Gordon approach method if dividend
payout ratio is 10% or 30%.

Q.4. Three companies A, B and C are operating under same business risk class that calls for a
return of 10% to the shareholders earn 15%, 10% and 12% respectively. If their earning per share
in the upcoming year are rs. 10 what would be the price of the share under the following three
alternative payout levels. (i) 30% (ii) 60% (iii) 80%. Using the Gordon Model, what are the
inferences that can be drawn from the above exercise?

Q.5. A company has a book value per share of Rs. 167.8. Its return on equity is 15% and it
follows a policy of paying 60% of its earnings. If the opportunity cost of capital is 18%, what is
the share price today?