Basic Questions of Dividend

Q1. A company earns Rs. 10 lakhs after tax and has two lakh shares outstanding. The market
capitalization of company is Rs. 200 lakhs. The company declares a dividend of Rs. 1.6 shares
on a face value of 8 Rs. per share. Compute, (a) Dividend yield (b) Payout ratio. (c) Dividend
rate.

Q2. Compute the market price of share from the following data: Earnings = 5,00,000, Required
rate of return (ke) = 20%, No. of shares = 50,000.

Q3. Compute the market price of share from the following data: Earnings = 5,00,000, Required
rate of return (ke) = 20%, No. of shares = 50,000, growth rate =10%

Questions of Dividend Models

Walter’s Model
Q4. The EPS of a company is rs. 8 and applicable capitalization rate is 10%. The company is
evaluating dividend payout ratio and is considering (a) 50% (b) 25% (c) 100%. Compute the
share price under Walter’s model assuming that the company can earn a return of (a) 15% (b)
10% and (c) 5% on its retaining earning for each of three alternative payout choices.

Q5. The Following information is available in respect of ABC ltd.

EPS = Rs 10, cost of capital = 0.1

Find out the market price of share under different rate of return, r of 8%, 10% and 15% for
different payout ratio of 0%, 40%, 60% and 100%

Q6. Following are the detail regarding three companies A ltd. and B ltd. and C ltd.

A Ltd. B Ltd. C Ltd.

Rate of return (r) 15% 5% 10%
Cost of equity capital 10% 10% 10%
EPS 8 Rs. 8 Rs. 8 Rs.
Calculate the value of an equity share of each of these companies apply the walter’s formula
when dividend payment ratio D/P ratio is: (a) 25% (b) 50% (c) 75%

What conclusion you draw.

Q7. The earning per share of the face value of Rs. 100 of PQR ltd. is Rs. 20. It has a rate of
return of 25%. Capitalization rate of risk class is 12.5%. If Walter’s model is used:

(a) What should be optimum pay-out ratio?

(b) What should be the market price per share if the payout ratio is zero?
(c) Suppose, the company has a payout ratio of 25% of EPS, what should be the price per
share?

Q8. The earnings per share of ABC ltd. is Rs. 10 and rate of capitalization applicable to it is
10%. The company has before it the option of adopting pay out of 20% or 40% or 80%. Using
Walter’s formula, compute the market value of the company’s share if the productivity of
retained earnings is (i) 20% (ii) 10% or (iii) 8%.

Q9. Determine the market value of the equity shares of the company from the following
information:

Earnings of the company 5,00,000 Rs.

Dividend paid 3,00,000 Rs.
Number of shares outstanding 1,00,000
Price to earning ratio 8
Rate of return of investment 15%

Are you happy with the company's current dividend policy? If not, what dividend payout ratio
should be considered ideal? Provide a thorough justification for your response. Apply the
Walter Model.
Q10. The EPS of company is Rs. 10. It has an internal rate of return of 15% and capitalization of
risk class is 12.5%. If Walter’s model is used-\

(i) What should be the optimum pay out ratio of the company
(ii) What should be the price of the share at this payout?
(iii) How shall the price of the share be affected, if a different if a different payout were
employed?

Q11. ABC co. has been following a dividend policy which can maximize the market value of the
firm as per Walter’s model. Accordingly, each year, at dividend time the capital budget is
reviewed in conjugation with the earnings for the periods and alternative investment
opportunities for the shareholders. In the current year, the firm expects earnings of 5,00,000. It is
estimated that the firm can earn Rs. 1,00,000 if the profits are retained. The investors have
alternative investment opportunities that will yield them 10% return. The firm has 50,000 shares
outstanding. What should be the dividend payout ratio in order to maximize the wealth of the
shareholders? Also find the current market price of the share.

Q12. From the following information supplied to you, ascertain whether the firm is following the
optimal dividend policy as per the Walter’s formula.

Total Earnings 2,00,000

Number of equity shares 20,000
Dividend paid 1,50,000
P/E ratio 12.5

The firm is expected to maintain its rate on fresh investment. Also find out what should be P/E
ratio at which the dividend policy will have no effect on the value of share.

Q13. A company earns Rs. 10 lakhs after tax and pays out 60% of its profits as dividends. The
number of shares outstanding is 1 lakhs. Its price earning multiples is 6. The company can invest
its retained earnings in the project that gives 15% IRR.

(a). Compute the theoretical market price using Walter model

(b). Is the company pay out practice in sync with maximizing the wealth of the shareholders.

(c). If the answer to above is “NO” what payout would you suggest.

(d). Is the Walter’s Model very different from the all or nothing approach explain.

Q14. Sahu and Co. earns Rs. 6 per share having capitalization rate of 10% and has a return on
investment at the rate of 20%. According to Walter’s model what should be the price per share at
30% dividend payout ratio? Is this the optimum pay out ratio as per walter.

Q15. The following figures are collected from the annual report of XYZ ltd.

Net Profit 30 Lakhs

Outstanding 12% preference shares 100 Lakhs
No. of equity shares 3 Lakhs
Return on Investment 20%
What should be appropriate dividend payout ratio so as to keep the share price at 42 rs. by using
Walters model.