Dividend Decisions

1. RST Ltd has a capital of Rs 10,00,000 in equity shares of Rs 100 each. The shares
are currently quoted at par. The company proposes to declare a dividend of Rs 10 per
share at the end of the current financial year. The capitalization rate for the risk class of
which the company elon!s is 1"#. $hat will e the market price of the share at the end
of the year, if
%a& a dividend is not cleared'
%& a dividend is declared'
%c& assumin! that the company pays the dividend and has net profits of Rs (,00,000
and makes new investments of Rs 10,00,000 durin! the period, how many new
shares must e issued' )se the ** model.
[CA Final, Nov. 2008]
Ans: (a) Rs 112; (b) Rs 102; (c) 5883 shares
2. + company has a ook value per share of Rs 1,-..0. /ts return on equity is 1(# and
it follows a policy of retainin! 00# of its earnin!s. /f the 1pportunity 2ost of 2apital is
1.#, what is the price of the share today'
[CA Final, a! 2002]
Ans: Rs 103.35
3. Sahu 3 2o. earns Rs 0 per share havin! capitalization rate of 10 per cent and has a
return on investment at the rate of "0 per cent. +ccordin! to $alter4s model, what should
e the price per share at ,0 per cent dividend payout ratio' /s this the optimum payout
ratio as per $alter'
[CA Final, Nov. 2002]
Ans: "rice #er share Rs 102;
"a!o$% ra%io is no% o#%i&$&.
4. 5 Ltd has . lakh equity shares outstandin! at the e!innin! of the year "00,. The
current market price per share is Rs 1"0. The 6oard of 7irectors of the company is
contemplatin! Rs 0.8 per share as dividend. The rate of capitalization, appropriate to the
risk9class to which the company elon!s, is :.0#.
%i& 6ased on ** +pproach, calculate the market price of the share of the company,
when the dividend is;%a& declared< and %& not declared.
%ii& =ow many new shares are to e issued y the company, if the company desires to
fund an investment ud!et of Rs ,."0 crores y the end of the year assumin! net
income for the year will e Rs 1.00 crores'
[CA Final, a! 2003]
Ans: 'ivi(en( (eclare( 'ivi(en( no% (eclare(
(i) 125.12 131.52
(ii)1,)8,*+8 1,21,)55.
5. The followin! fi!ures are collected from the annual report of 5>? Ltd@
Rs lakh
Aet Brofit ,0
1utstandin! 1"# preference shares 100
Ao. of equity shares ,
Return on /nvestment "0#
$hat should e the approCimate dividend payout ratio so as to keep the share price at
Rs 8" y usin! $alter model'
[CA Final, a! 2005]
Ans: 'ivi(en( #a!o$% ra%io 52,, cos% o- ca#i%al 1),.
6. The followin! information pertains to *Ds 5> Ltd@
Earnin!s of the 2ompany Rs (,00,000
7ividend Bayout ratio 00#
Ao. of shares outstandin! 1,00,000
Equity capitalization rate 1"#
Rate of return on investment 1(#
%i& $hat would e the market value per share as per $alter4s model'
%ii& $hat is the optimum dividend payout ratio accordin! to $alter4s model and the
market value of 2ompany4s share at that payout ratio'
[CA Final, a! 200)]
Ans: (i) Rs. .5.83, (ii) /#%i&$& (ivi(en( #a!o$%
ra%io N01, ar2e% val$e o- co&#an!3s share Rs 52.08.
7. A62 Ltd has (0,000 outstandin! shares. The current market price per share is Rs
100 each. /t hopes to make a net income of Rs (,00,000 at the end of current year. The
company4s 6oard is considerin! a dividend of Rs ( per share at the end of current
financial year. The company needs to raise Rs 10,00,000 for an approved investment
eCpenditure. The company elon!s to a risk class for which the capitalization rate is
10#. Show how does the ** approach affect the value of firm if the dividends are paid
or not paid.
[CA Final, Nov. 200)]
Ans: 4al$e i- -ir& re&ains share a% Rs 50,00,000.
5he%her %he (ivi(en(s one #ai( o- no%
8. The followin! information is supplied to you@
Rs
Total Earnin!s ",00,000
Ao. of equity shares %of Rs 100 each& "0,000
7ividend paid 1,(0,000
BriceDEarnin! ratio 1".(
%a& +scertain whether the company is the followin! an optimal dividend policy.
%& Find out what should e the BDE ratio at which the dividend policy will have no
effect on the value of the share.
%c& $ill your decision chan!e, if the BDE ratio is . instead of 1".('
[CA Final, a! 200*]
Ans: (i) Co&#an! is no% -ollo6in7 or o#%i&al (ivi(en( #olic! &ar2e% #rice
o- %he share can be increase( b! a(o#%in7 a 8ero #a!o$%.
(ii) "9: ; 10, %he (ivi(en( #olic! 6o$l( have no
e--ec% on %he val$e o- %he shares.
9. * Ltd elon!s to a risk class for which the capitalization rate is 10#. /t has "(,000
outstandin! shares and the current market price is Rs 100. /t eCpects a net profit of Rs
",(0,000 for the year and the 6oard is considerin! dividend of Rs ( per share.
* Ltd requires to raise Rs (,00,000 for an approved investment eCpenditure. Show,
how does the ** approach affect the value of * Ltd, if dividends are paid or not paid.
[CA Final, a! 2008]
Ans: 4al$e o- 1%( in bo%h cases Rs 30,00,0)0.