PART C : COST OF EQUITY CAPITAL ( INCLUDING

RETAINED EARNINGS )


Mini case 1: Calculation of retention ratio (Abbreviated as ~b)

Calculate the Retention ratio for Dream Ltd.-

Case (a) Earnings per share (EPS) is Rs. 10, Dividend per share (DPS) is Rs. 6.
(neL lncome ulvldends)/neL lncome
(106)/10 2]S

Case (b) Dividend Payout ratio is 80
eLenLlon raLlo 1 ulvldend payouL aLlo 108 02


Mini Case 2 : Calculation of Price Earnings ( P/E ) Ratio
Calculate the Price-Earning ratio (P/E ratio) in each of the following situations.-

Case (a) Current Market price of the share is Rs 50/- & Current Earnings per share (EPS)
is
Rs. 10, Dividend per share (DPS) is Rs. 6.

Market price/ EPS 50/10 5

Case (b) Rate of return on retained earnings is 25.

R 1/PE

251/PE ~ / 1/PE

PE 4

Case (c) Current Market price of the share is Rs 50/- & Current Dividend per share (DPS)
is
Rs. 10 and dividend payout ratio is 80.
80 oI EPS 10
EPS 10*100/80 100/8 12.5
MP/EPS 50/12.5 4



Mini Case 3: Calculation of Rate of Return on Retained Earnings (r)
colcolote tbe kote of ketotos (k) lo eocb of tbe coses
Case (a) Current Market r|ce of the Share |s ks S0 ] Current Larn|ngs er Share (LS) |s ks 10
D|v|dend er Share (DS) |s ks 6
r LS/p0
10/30 02

20
Case (b) r|ce earn|ngs kat|o ( ]L ) kat|o 4
1/L
x

23
Case(c) MS ks S0 DS |s ks 10 and D|v|dend ayout kat|o |s 80
LS * 80 10
LS 10/08 123
123 0f 30/30
123

Mini case 4: Calculation of growth rate (~g)
Calculate the growth rate ('g`) in each of the following situations.-

Case (a) Retention ratio (~b) is 40, & rate of return on retained earnings (~r) is
20?

growth rate g b*r
.4*.2
.088

Case (b) Dividend payout ratio is 70 & rate of return on retained earnings (~r) is
20

retention rate100-7030
g r*b
.3*.2 .066

Case (c) Dividend payout ratio is 80, Price Earning ratio is 8

retention rate(b)100-8020
rate oI return on retained earnings ('r)EPS/mkt. price per share
r E/P(i.e. inverse oI PE ratio)
gb*rb*(E/P)
.2*(1/8)
2.5

Case (d) Dividend payout ratio is 90, Earnings Yield is 20.
retention rate(b)100-9010
Earning20 ( this is E/P) rate oI return on retained earnings`r`
gb*r
.10*.2
2