Nuha Textiles Equity Share Sells For Tk. 23 Per Share

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Nuha Textiles equity share sells for Tk. 23 per share. The company’s finance manager anticipates a constant growth rate of 10.50 percent and end of year dividend is Tk. 2.50. If the investor requires a 17% return, should the company purchase the stock?

To determine whether the stock should be purchased, we can evaluate it using two standard financial approaches: Intrinsic Value (Gordon Growth Model) and Expected Rate of Return.

Given Data:

Current Market Price (): Tk. 23.00
End-of-Year Dividend (): Tk. 2.50
Constant Growth Rate ():
Required Rate of Return ():

Method 1: Intrinsic Value (Gordon Growth Model)

The formula to calculate the fair/intrinsic value (

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) of the stock is:

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Substitute the values:

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Intrinsic Value: Tk. 38.46
Market Price: Tk. 23.00
Conclusion: Since the intrinsic value () is greater than the current market price (), the stock is undervalued.

Method 2: Expected Rate of Return

The expected rate of return (

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) on the market price is calculated as:

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Substitute the values:

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Expected Return: 21.37%
Required Return: 17.00%
Conclusion: Since the expected return () exceeds the required rate of return (), the investment provides an attractive excess yield.

Final Decision & Answer:

Yes, the investor should purchase the stock.

It is currently undervalued by Tk. 15.46 per share (worth Tk. 38.46 but selling for Tk. 23.00) and offers an expected return of 21.37%, which easily beats the investor’s required return of 17%.

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