FINANCIAL MANAGEMENT

ASSIGNMENT - 6

SUBMITTED BY- SUBMITTED TO-

MD JEESHAN Ms. BUSHRA MAM
PGDM 2 B
ABS/PGDM/19/081
Question:
The earnings per share of ABC Ltd is Rs. 8 per share and rate of capitalization applicable is
10%. The company has before it, an option of adopting following Dividend payout ratio:-

1. 50%
2. 75%
3. 100%

Compute market price of company’s quoted shares as per Walter’s model.

If it can earn a return of 15%, 10% & 5% on its retained earnings.

Solution:

Walter’s Model Formula:

r
D+ ------------ (E-D)
ke
P = ----------------------------
ke
Where,
P = Market value of share
D = Dividend per share
E = Earnings per share
r = Returns on retained earnings
ke = Capitalization rate

1. Price of share if r = 15%

i. DP Ratio = 50%

0.15
4 + ------------ (8-4)
0.1
P = ------------------------------
0.1

10
P = ----------
0.1

P = Rs.100 Answer

ii. DP Ratio = 75%

 0.15
6 + ------------ (8-6)
0.1
P = ----------------------------
0.1

9
P = ----------
0.1

P = Rs.90 Answer

iii. DP Ratio = 100%

0.15
8 + ------------ (8-8)
0.1
P = ------------------------------
0.1

8
P = ----------
0.1

P = Rs.80 Answer

2. Price of share if r = 10%

i. DP Ratio = 50%

0.1
4 + ------------ (8-4)
0.1
P = ------------------------------
0.1

8
P = ----------
0.1

P = Rs.80 Answer
 ii. DP Ratio = 75%

0.1
6 + ------------ (8-6)
0.1
P = ------------------------------
0.1

8
P = ----------
0.1

P = Rs.80 Answer

iii. DP Ratio = 100%

0.1
8 + ------------ (8-8)
0.1
P = ------------------------------
0.1

8
P = ----------
0.1

P = Rs.80 Answer

3. Price of share if r = 5%

i. DP Ratio = 50%

0.05
4 + ------------ (8-4)
0.1
P = ------------------------------
0.1

6
P = ----------
 0.1

P = Rs.60 Answer

ii. DP Ratio = 75%

0.05
6 + ------------ (8-6)
0.1
P = ------------------------------
0.1

7
P = ----------
0.1

P = Rs.70 Answer

iii. DP Ratio = 100%

0.05
8 + ------------ (8-8)
0.1
P = ------------------------------
0.1

8
P = ----------
0.1

P = Rs.80 Answer