Dividend Decision Practice Questions

1. The earnings per share of ABC Company is Rs.8, and the rate of capitalization applicable to
the company is 10%. The company has before it an option of adopting a payout ratio of 25% or
50% or 75%. Using Walter’s formula of dividend payout, compute the market value of the
company’s share if the productivity of retained earnings is (i) 15% (ii) 10% and (iii) 5%.

Q.2 The following information relates to XYZ Ltd.:

You are required to find out whether the company’s dividend payout ratio is optimal, using
Walter’s Model. What is the market price of the share? (hint Ke= 1/Price earning ratio)

Q.3.A company has 100000 shares of Rs.10 each. The company expects its earnings to be
Rs.7,50,000 and the cost of capital at 10% for the next financial year. Using Walters model what
dividend policy will you recommend when the rate of return on investment of the company is
estimated at 8% and 12% respectively? What will be the price of the equity share if your
recommendations are accepted?

Q.4 Omega Ltd. Has a cost of equity capital of 10%, the current market value of the shares is Rs
20 each while the value of the firm is Rs. 20,00,000. If the investment requirement for the next
year is Rs.6,80,000 while the expected profit of the company is Rs.1,50,000 and the company is
proposing to pay Re. 1 as dividend per share. Show that under Modigliani and Miller
assumptions, the payment of dividend does not affect the value of the company.

Q.5 Zenith Ltd. Has given you the following information

Profit= Rs100000, Equity capital is 5000 shares of Rs10 each. Cost of capital is 10% and
expected rate of return is a) 9% , b) 10% and c) 12%
Assuming that the dividend payout ratio is 0%,50% and 100% respectively , determine the effect
of different dividend policies on the value of the shares by Gordon Model.

Q.6 Agro chemicals Company has a capitalization rate of 10%. It currently has 1,00,000 shares
of Rs.100 each. The company is planning to pay a dividend of Rs.5 on each shares. The profit of
the company for the year is Rs.10,00,000. If the company is planning an investment of
Rs.15,00,000 for the next year, which will be funded by retained earnings and issuance of new
equity shares. What will be the price of the shares at the end of the year if the dividend is
declared and if the dividend is not declared? How much new shares should be issued by the
company in both the cases. Answer these questions on the basis of MM model and assume there
is no taxes.

Q.7 A company has 10,000 equity shares of Rs.10 each. I t expects its earnings at Rs.75,000 and
the cost of capital at 8% for the next financial year. Using Walters model what dividend policy
will you recommend when the rate of return on investment of the company is estimated at 6%
and 10% respectively? What will be the prices of equity share?