The stock of Nepal Corporation is currently selling for Rs 100 per share. Earnings per share in the coming year are expected to be Rs 20. The company…
BBA Investment Analysis · 2025 · Solved Question with Answer
The stock of Nepal Corporation is currently selling for Rs 100 per share. Earnings per share in the coming year are expected to be Rs 20. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely.
a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nepal's investors require?
b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?