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Dividend Decisions

1) The following formation is acquired from XYZ Ltd. net earnings – Rs.1,00,000, Equity capital
5,000 share of RS. 10 each, cost of capital 10%, expected rate of return (a) 9%, (b) 10% and (c)
12%.

Assuming the dividend pay-out ratios are 0% ,50% and 100% respectively. Determine the effects of
different dividend policies on the share price of XYZ Ltd. for the above mentioned 3 alternative levels
of return using Gordon’s Model.

2) Z. Co. Ltd. has an investment of Rs. 10,00,000 in equity share of Rs.100 each. The profitability
rate of the company is 16%. Pay-out ratio is 80% .cost of capital is 10%. What will be the price
per share as per Walter’s model ?do you consider the given pay-out ratio as optimum?
[Ans.Rs.179.20, optimum ratio.]

3) From the following information, calculate the market value of equity share outstanding –
3,00,000 ; dividend paid – 6,00,000; price earnings ratio – 10; rate of return on investment –
20%.
What is optimum dividend pay – out ratio in this case?
[Ans. 0]

4) The following information are available from Essar Co. Ltd.

Net earnings – Rs.1,00,000; equity capital- 5,000 shares of Rs.10 each, cost of capital – 10%,
expected rate of return (a) 9%; (b) 10%and (c)12%.
Assuming the dividend ratios are (a) 0%; (b) 60%; and(c) 100% respectively, determine the
effect of different dividend pay-outs on the share price of Essar Co. Ltd. for each of the above
mentioned 3 alternatives levels of return using Gordons Model.

5) A company belongs to a risk class for which the appropriate capitalisation rate I s10%. It
currently has outstanding 25,000 shares selling at Rs.100 each. The firm is contemplating the
declaration of dividend of Rs.5 per share at the end of current financial year. The company
expects to have a new income of Rs.2.5 lakhs and has proposal for making new investment of
Rs.5 lakh.
Answer the following questions based on M-M model (assume there is no tax):
a) What will be the price per share at the end of the year if dividend is paid ?
b) What will be the price per share at the end of the year if dividend is not paid?
c) How many new shares are to be issued?
d) Determine the value of the firm considering (a) and (b) as stated above.
[Ans.a) 105; b) 110; c) when dividend is paid: 3,572; d) when dividend is not paid : 2,237]

6) You are given the following information :

Earnings per share Rs.3
Internal rate of return 15%
Cost of capital 12%
What will be the price per share under Walter’s Model, when the dividend pay-out ratio is 50%,
75% and 100%?
7) From the following data calculate the value of an equity share of each of the following 3
companies according to Walter’s Model when dividend pay-out ratio is
(a) Nil, (b) 25% and (c) 75%

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Phone – 99035-03989

Companies M.Ltd. L.Ltd. N. Ltd.

Internal rate of return ® 15% 12% 10%
Cost of capital (k) 12% 12% 12%
Earnings per share (E) Rs.10 Rs.10 Rs.10
What conclusion would you draw from the observation?

8) From the following information, calculate value per equity share on the basis of Gordon’s
Model. Earnings per share are Rs.6, internal rate of return is 30% and cost of capital is
10%.dividend pay-out ratios are 60% and 100%.
[Ans. when dividend pay-out ratio is 60% negative; when dividend pay-out ratio is 100%
Rs.60]

9) Given earnings per share is Rs.90. calculate market price per share of a company using Gordon’s
Model when dividend pay-out is i) 30% and ii) 60% assuming that:
a) A company is a growth company (r>k)when r= 20%
b) The company is a normal company (r=k) when r=k= 15%
c) The company is a declining company (r<k) when r= 12%
Also comment on the result.

10) From the following information supplied to you ,determine the market value of equity shares of
a company as per Walter’s Model :
Earnings of the company Rs.5,00,000
Dividend paid Rs.3,00,000
No. of shares outstanding 1,00,000
Price-earnings ratio 8
Rate of return on investment 0.15
Are you satisfied with the current dividend policy of the firm? If not, what should be the
optimal dividend pay-out ratio in this case?
[Ans. Rs.48]

11) A company has 1,00,000 equity shares of Rs.10 each the company expects its earnings at Rs.
6,00,000 during the next financial year and its cost of capital is 10%. Using Walter’s Model,
what dividend policy would you recommend when the rate of return on investment is estimated
at
i) 8% and ii) 12%
What will be the price of each equity share if your recommendation is accepted?
[Ans. Rs.48; Rs. 60]

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from the best. Centres – Bhawanipur – Girish Park – Tollygunj – Bangur – Howrah.