Vinay commerce classes Financial Management Prof.

Vinay Gohil

Q.1.Calculate the market price of share as per Walter model and Gordon model.

Retention Ratio 50
%
Internal rate of return 20
%
Cost of capital 16
%
Dividend per share Rs.3
Earning per share Rs.5

Q.2.Following are the details regarding three companies A Ltd.,B Ltd.,and C ltd

Particulars A Ltd. B Ltd. C Ltd.

Internal rate of return 15% 5% 10%
Cost of Equity 10% 10% 10%
Earnings per share Rs.8 Rs.8 Rs8
Calculate the value of a equity share for each of company applying Walters model when dividend payout
ratio is (i)52% (ii)75%

Q.3.Lily Ltd. earns Rs.6 per share having a capitalization rate of 10% and has a return on investment of
20%. According to walters model what should be the price of the share at 25% dividend payout.?

Q.4.From the following details of jasmine ltd. Calculate the value of an equity share of the company
applying Walters formula.
Internal Rate of return=15%
Cost of equity capital =10%
EPS= Rs.12
D/P=25%

Q.5.From the following details jasmine Ltd. Calculate the value of an equity share of the company
applying walters formula.
Internal Rate of return =10%
Cost of equity capital=10%
EPS= Rs.16
D/P ratio=50%

Q.6.From the following details of mogra Ltd.calculate the value of an equity share of the company
applying walters formula.
Internal rate of return=10%
Cost of equity capital=12%
EPS=Rs.8
DPS=Rs.5

Q.7.The earnings per share of a company are Rs.10.It has an internal rate of return of 18% and the
capitalization rate of its risk class is 12.5%.If walters model is used what would be the price of the share
at 80% payout?

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Vinay commerce classes Financial Management Prof. Vinay Gohil

Q.8.A company has a total investment of Rs.5,00,000 in assets ,and 50,000 outstanding ordinary shares
at Rs.10 per share.It earns a rate of 20% on its investment. And has a policy of retaining 40% of the
earnings.
If the appropriate discount rate of the firm is 10%,determine the price of its share using Gordons model.

Q.9.A company earns Rs.10 per share at an internal rate of 16%.The firm has a policy of paying 60% of
earnings are dividends . If the required rate of return is 10% determine the price of the share under (i)
Walters model (ii) Gordon’s model.

Q.10.Lotus Ltd. has an investment of 50 crores divided into 50 Lakh ordinary shares. The profitability rate
of the firm is 28% and the capitalization rate is 15.5% What shall be the price of the share at 50% payout
if walter”s model is used.

Q.11.The following data relate to new age firm:

EPS= Rs.10
Capitalization rate=10%
Retention ratio= 30%
Determine the price of the share Under Walter’s and Gordon”s models if the return is (i)15% (ii)5%

Q.12.ABC Company Ltd. is expecting 10% return on total assets of Rs. 50 Lakh. The company has
outstanding shares 20,000. The directors of the company have decided to pay 40% of earning as
dividends. The rate of return required by shareholders is 12.5%. Rate of return expected on investment is
15%. You are required to determine the price of the shares using Walter’s Model.

Q.13. The following information is available in respect of a company:

Capitalization Rate (ke) = 0.12
EPS = Rs. 15
Rate of return on investment = (i) 0.15 (ii) 0.10
The company wants to know the effect on the market price of its shares under the two possibilities of(r )
i.e. 0.15 and 0.10 under the two options.
(a) If it does not declare any dividend, and
(b) If it declares Rs. 15 as dividend.
Using ‘Walter’s model ‘ explain the results obtained by you.

Q.14. The following information is available in respect of a company:

Capitalisation rate (ke) = 0.12
EPS = Rs. 15
Rate of return on investments (r ) : (i) 0.15 (ii) 0.10
The company wants to know the effect on the market price of its shares under the two possibilities of
r(i.e. 0.15 and 0.10) under two options: (i) if it does not declare any dividend and (ii) if it declares Rs. 15
as dividend. Using Walter’s model explains the results obtained by you.

Q.15. The following data is available for Modi Company Ltd.

Earning per share Rs. 2
Internal rate of return 18%
Cost of capital 16%

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Vinay commerce classes Financial Management Prof. Vinay Gohil

If Walters Valuation formula holds, what will be the price per share when the dividend payout ratio is
50%, 80% and 100%.?