3 DECISIONS IN FM

p p 1

INVESTMENT DIVIDEND FINANCE

DECISIONS DECISIONS DECISIONS

DIVIDEND DECISIONS
#

•
A
p
A
p
C
p
B
µ
A
☆ µ
GORDONS
'

'MALTER GRAHAM LINTER MM MODEL BUYBACK

METHOD MODEL AND DODD OR 51045

REPURCHASE
I -
market Price NO CHANGE IN
charges upon
TOTAL MARKET SHARE
declaration of dividend .

OR VALUE OF FIRM

KLAVER METHOD : IFSH INVEST ELSEWHERE

DECLARED
Profiting
:

✗REMAIN
ROI =ke
CO GETS
IF G. ITSELF INVEST

ROI ± R

( d)
☐ +
R v
× e-
po =
e
IF R > Ke → DIVX 0-1 .

R = Ke > MAY 0 -100T .

Ke
R < Ke > MUST 100T '

kl HERE

D= DIVIDEND
✓
RIKE =

e =
earnings EPs / Total
Po : market Price .

GRAHAM AND DODD MODEL :

BASE :

[ ]
☐+
Po = m ✗
MP =
Multiplier ofdividend
multiplier is for 'D !
only
MULTIPLIER .

c.y
Divided c- 4 Earning pie Diu #1

LINTER METHOD -p ↑ ↑ / Adjustment

Di = Do +
④ ✗ Tp -
Do ) ✗ AF ] Factor

Flhltlhltytnf ↓
Target Payout ratio
MM APPROACH ?

=[@ )
VALUE OF FIRM EW SHARES #OLD SHARES P, -
INVESTMENT d- EARNINGS

• + Ke -

Po = ( Mtm ) Pi -

ITI +

ltke

MARKET PRICE OF SHARE =

Po ✗ (like -
DI

( PI)

NO OF SHARES TO BE ISSUED
- = I -
⇐ -
D)
Pi

GORDON's MODEL

retaining Ratio / %
D'
Po =
= E✗ 4- b)
Ke -

g ke -
b✗ r
rare of return on reinvestment
# rate
↓
a
Growth .

Growth
Eps : 200k = 2000
KLAVER MODEL
at

PAYOUT RATIO DIVIDEND KORI Po : =

☐+
[e- [E-DD
20% 400 Ke
40't 800 (T) Po = 20000×10LAKHS = 200002s

60-1 1200 19167 IOLAIUTS 1916^6 CRS

41) Po = ✗ =
.

SOY 1600 18333.33×10LAKHS

.
411) Po =
= 1833-33 CRS
(in) Po =
17500 ✗ 104A/Uts = 1750 CRS '

> IF
EARNING 101 -

DIVIDEND 20%01--10 → PAYOUT RANO

RATIO
BALANCE 80-1-01=10 → RETENTION
 Dividend+(Earnings-Dividend)*ROI
Value of firm under walter model Ke
Ke
r = 15% Ke = 12% DIVAS
PAYOUT RAMO =
i) Payout ratio 20% For whole
EPScompany
Dividend 200cr*20% 40 cr
Retained Earnings 200cr-40cr = 160cr
D+(E-D)* r 40cr+(200cr-40cr)* 0.15
Value of firm Ke 0.12 2000 cr
Ke 0.12
EPS 200cr/10L 2000 Per share
Dividend@20% 400 Retained Earnings 1600
400+(2000-400)* 0.15
Value of firm 0.12 20,000*10L 2000 cr
0.12
 ii) Payout ratio 40%
Dividend
Retained Earnings
200cr*40% 080 cr
200cr-80cr = 120cr
=
80cr+(200cr-80cr)* 0.15
Value of firm 0.12 1916.67 cr
0.12 =
iii) Payout ratio 60%

0000
Dividend 200cr*60% 120 cr
Retained Earnings 200cr-120cr = 80cr
120cr+(200cr-120cr)* 0.15
Value of firm 0.12 1833.33 cr
0.12
 iv) Payout ratio
8 80%

0000
Dividend 200cr*80% 160 cr
Retained Earnings 200cr-160cr = 40cr
160cr+(200cr-160cr)* 0.15
Value of firm 0.12 1750 cr
0.12

Since r > Ke optimal payout is at 0%

Dividend 0
Retained Earnings 200cr-0cr = 200cr
0+(200cr-0)* 0.15
Value of firm 0.12 2083.33 cr
0.12
As the dividend amount increases the value of firm decreases
 2150000+2%8-+50000
Po

EPS = 10

132.8 1

1 56 25
.

Pe I
=
/ Ke And Ke = 10-1
.
 Given
Total Earnings 2,00,000 Equity shares(100) 20000shares
Dividend paid 1,50,000
P.E ratio = 12.5
Ke 1/P.E ratio 1/12.5*100 8%
Rate of return 2,00,000
10%
20,00,000
D+(E-D)* r 7.5+(10-7.5)* 0.10
i) Value of share
Ke 0.08 132.8125
Ke 0.08

ii) r >Ke Optimal payout is 0%

D+(E-D)* r 0+(10-0)* 0.10
Market value of share 156.25
Ke 0.08
Ke 0.08
iii) Dividend policy which have no impact on value of share is at r = Ke
r = 10 Ke = 8
r = Ke = 10%
P.E ratio 1/Ke 1/10% 10 Times

iv) D+(E-D)* r 7.5+(10-7.5)* 0.10

Market value of share Ke 0.125 76
Ke 0.125
 DELETED
=
re

R
36.67

R
20 -1 .

> Ke → 0%
 i) Market value of share(MPS) under walter model

D+(E-D)* r 2.4+(4-2.4)* 0.15

Ke 0.12 36.67
Ke 0.12

ii) Let x be the dividend

(Earnings *payout ratio)+(Earnings-{Earnings*payout ratio})*ROI
40 Ke
Ke
x+(4-x)* 0.15
40 0.12
0.12
4.8 x + 4*1.25 - 1.25x
4.8 x + 5 - 1.25x
0.25x = 0.2 X = 0.2/0.25 0.8
 Dividend Earnings * payout ratio
0.8 4 * payout ratio
Payout ratio 0.8/4*100 20%

iii) r = 15% Ke = 8
Since r >Ke Optimal payout is 0%

0+(4-0)* 0.15
iv) Market price of share 0.12 41.667
0.12
GORANI
PROBLEM -4

Po =
F- ( 1- b)

ke
'
-
(bxr)
b- ② ① ÷②=③
PAYOUT RAMO RETENTION E( 1- b) b ✗ 0.20 0-16 br
EARNINGS
-

450000 0115 0-01 45Wh

25-1 . 18L 0-75

900000 0^1 0.06 15K

50-1.
18L 0.50

1800000 °
0.16
100-1 . 18L 0.00 11250000

ps =
③ ÷ 34

= 15000000

=
5000.0000

3750000J
i) profit 30,00,000
(-)preference
12,00,000
dividend
earnings 18,00,000

Earnings per share 18L/3L 6

Po = D1 Po = 6*25%
1.5/0.01 150 per share
Ke-g 16-(75*20%)
ii)
Po = D1 Po = 6*50%
3/6% 50 per share
Ke-g 16-(50*20%)

iii) Po = D1 Po = 6*100% 6/16% 37.5 per share

Ke-g 16-(0*20%)
Po Dl
02%5=20
=
(9) 2111-5-1 ) .

p, = =

ke -
8 0.155-0.05

DELETED = 2111-5/1%1 2.16

=
_
-28^8
0^155-0.08 0.075

= 2111-3-1 )
.

= #6--16-48
O' 155-0.03 0-125
 Ke = D1+g
Po D1 = (1+g)

i) Dividend @5%
(2+5%)+0.05
0.155 Po .
Po 2.1/0.105 20
ii) When growth rises to 8%
(2+8%)+0.08
0.155 Po .
Po 2.16/0.075 28.8
iii) When growth rises to 3%

0.155 (2+3%)+0.03 16.48

Po 2.06/0.125
Po .
146 =
,g=¥?÷,g = 146 Ke -
14610-0757=3-36
↳

Kc = 3.36-1-14610-075)

146

Re = 9.8

-
-0 -

- - - -

✓= 3-36 E- (1-0-6)
0.10 ↳= 0-640 → Re =
? =

o?ˢ
E =
Ell -
O 60)
- = 13.44
146 =

Re -
(0.6×0-1)
 Given 146 = 13.44/0.401
Po = 146 D1 = 3.36 Ke -
(06×0-1)
E(1-retention ratio)
i) Po
Ke b*r 146K -
146/0-6×0 1) -

146 3.36 = 13 '

44 (0^40)
Ke 0.075 9.8

Earnings(1-retention ratio) Re = 1-3-4410 -4011-146/0-6

ii) Po ✗ o 1) -

Ke b*r

146 13.44(1-0.6) 146

W.N1
Ke (0.6*0.1)
=
Ke-0.06 9.682^1 .

5.376/146
Ke = 9.682%
9=0-6×0 -
I
 Working notes

1 Earnings(1-retention ratio) 3.36

Earnings 3.36 3.36
13.44
(1-retention ratio) 1-0.75

W.N:2
2 Growth Retention ratio * Return on investment
7.5 Retention ratio *0.10
Retention ratio 75%
Payout ratio 25%
 PAT
DELETED
> b
>

Ke

E( 1- b) ,
Po =
E- D)
Ke -
Cbxr) Po=Dt-ex(
= ( 2.50 -40% )( 0.601 Ke
=
[1.5-0.9]
(0.40×0^15) ⑥
9t֤
'
0^12 -
✗
= O IL-

0.06
Market price of share(MPS) under walter model
= & Gordon model
13-75
27-5
=
• 50 '
5
Particulars Amount
= 30 PBT '
2.50cr
(-)Tax @40% 1cr
PAT 1.5cr
PAT per share = 1.5cr/50L 3

Dividend payout per share 3 * 60% 1.8

Retention ratio per share 3 * 40% 1.2

 Value of share under walter model

D+(E-D)* r 1.8+(3-1.8)* 0.15

MPS Ke 0.12 27.5 per share
Ke 0.12

Value of share under Gordon model

Growth
Po = D1
Ke-g Retention ratio * Return on investment
40*15%
Po = 1.8
0.12-0.06 g = 6%

Po =1.8/0.06

30 per share
 ✓

58.33=7
[5 t ¥]
58-33 =
351-743
 23-33>113-2 E = 9 -99 / 10 .

Graham &Dodd approach

Po M(D+E/3)
58.33 7(5+E/3)
58.33 7(15+E)
3
174.99/7-15 E

E 9.99
 D, = Do +
¢ E, ✗ TP - Do ] ✗ AF
]
0-60]
14 2 12 + [ EXO 4
- - 12
] ✗

Di " PTP

[ 0.24 E- 7-2 ]
9¥24
2 =
= E 38 -33

9=3%7%5 =
Mp = (38.33×9)×101 = 344970000
 D1 Do + (E * payout ratio Do) Adjustment factor
14 12 + (E * 0.4 12) 0.6
E 38.33 -199997 I ~ 10 LAKHS
MPS
P.E Multiple 9 9 MPS 344.99
38.33
999967 ~ 10hAM's
Market value 344.99 * 10,00,000 3449,90,000
(5882 + 10000) 102 -
10L +5L
1- 12
( MTM) Pi
- IT * ☒

Po = A tke (4464 +10000) 112 - 10L +5L

1- 12
 y

Pocltke ) - D,
>

> 10011.12) - 0=112

> 10011-12) -
10=102

I -

(E -
D) 1000000-(500000-100000)
PI 102

5882.351
 Given 4464 -
28 ( IF DIU NOT DEW

Po = 100 Current market price

:[
-

Ke = 12% Cost of equity ¥1k

a) We know that Po = D1+P1
1+Ke

If dividend is not paid D1=0

100 0+P1
1+0.12
100 *1.12 P1
P1 112
b) If dividend is declared
Po = 100 Ke = 12% D1=10

Po = D1+P1 100 = 10+P1 112-10 = P1

1+Ke 1.12
P1=102
c) Investment required 10,00,000
(-) retained earnings
4,00,000
(5,00,000-1,00,000)

Net profit dividend

Fresh issue 6,00,000

No. of shares to be issued 6,00,000/102 5883 shares
SEP-1 : (Mtm) P , - It ×

like

((250001-3571) 105 -
521-2-5L) ÷ 1.10 >
2449959 09
-

(250001-2273) 110 -
5L 1-2-52 ÷ 1.10 → 25000027-27

STEP -2 ! P, =
@ o ✗ Litke ))- Di = (100×1-10) -5
110
=
105
= = 2273

SEP -3 : I - E -
D :-P ) = 3571
105
 Given
Ke = 10% Po = 100
If dividend is paid
Po = D1+P1 100 = 5+P1
1+Ke 1+0.10 110-5 = P1 P1=105

Investment 5,00,000
(-) retained earnings
1,25,000
(2,50,000-5*25000)
3,75,000
No. of shares to be issued 3,75,000/105 3571 shares

Value of Firm (n+m)P1-I+E (25000+3571)105-5,00,000+2,50,000

1+Ke 1+0.10

25,00,000
 If dividend is not paid
Po = D1+P1 100 = 0+P1
1+Ke 1+0.10 110-0 = P1 P1=110

Investment 5,00,000
(-) retained earnings 2,50,000
2,50,000

No. of shares to be issued 2,50,000/110 2273shares

Value of Firm (n+m)P1-I+E (25000+2273)110-5,00,000+2,50,000

1+Ke 1+0.10

25,00,000
DELETED
Fund available for buy back 100L*27% 27L
Post buy back price of share will increase by 10%
Let Po be the present market price
Post buy back market price = 1.1Po
No. of shares to be repurchase be x
Total no. of shares a present 10,00,000
No. of shares post buy back 10,00,000 - x
27,00,000 X*Po 1
Market value of company (post buy back ) 210L
No. of shares after buy back * Post buy back price = 210L
10L x * 1.1Po = 210L 2
Solving 1&2 Po = 210L 27L 210L
Po = 27L/x from1 (10L-x)1.1 x 11L-1.1x
 297L 29.7Lx = 210Lx
297L = 239.7Lx
X = 123905 shares
Po = 27L/123905 21.79
Impact of EPS post buy back 30,00,000 30,00,000
(10L-123905) 876095 3.424