Dividend Decisions 7

Allustration 2: From the following information supplied to you, determine

the theoretical market value of equity shares of a company as per Walter's

model:

Earnings of the company Rs 5,00,000

Dividends paid Rs3,00,000

Number of shares outstanding Rs1,00,000
Price earning ratio 8
0.15
Rate of return on investment
lf not,
Are you satisfied with the current dividend policy of the firm?
what should be the optimal dividend payout ratio in this case?
llustration 3:
The following information is supplied to you, about a company:
Earnings of the company Rs 15,00.000
Dividends paid
Rs5,00,000
Number of issued shares Rs1,00,000
Price earnings ratio 10
Rate of return on investment (%) 15
1. Determine the theoretical market price of the share.

2 Are you satisfied with the current dividend policy of the firm? If not,
what should be the optimal dividend payment ratio in this case?
 0,

Illustration 11: A textile company belongs to a risk-class for which the

appropriate P/E ratio is 10. It currently has 50,000 outstanding shares selling
at Rs 100 each. The firm is contemplating the declaration of Rs 8 dividend
at the end of the current fiscal year which has just stared. Given the
assumption of MM, answer the following questions.
1. What will the price of the share be at the end of the year: (a) if
dividend is not declared, and (b) if it is declared??

2 Assuming that the firm pays the dividend, has a net income (y) of Rs
5,00,000 and makes new investments of Rs 10,00,000 during the
period, how many new shares must be issued?

3 What will the value of the firm be: (a) if dividend is declared, and (b) if
dividend is not declared?
Allustration 12: The Asbestos company belongs to a risk class of which the
appropriate capitalization rate i To per cent. It currently has 1,00,000
shares selling at Rs 100 each. The firm is contemplating the declaration of a
Rs 6 dividend at the end of the current fiscal year, which has just began.
Answer the following questions based on Modigliani and Miller model and
the assumptions of no taxes.
1. What will be the price of the shares at the end of the year, if a
dividend is not declared? What will it be if it is declared?

2 Assuming that the firm pays dividend, has a net income of Rs

10,00,000 and makes new investments of Rs 20,00,000 during the
how many new shares must be issued?
period,
Illustration 15:
The following is the data available for Newton Limited:

Earnings per share =

Rs 66
Rate of return=18%

Cost of capital=15%
As per Gordon's basic valuation, what will be price of the share when
dividend payout is 30%and 40%.
Iustrauron TO:

The following is the data available for KPI Limited:

Earnings per share =

Rs 8
Rate of return on investment =
16%
Rate of return required by shareholders= 12%
As per Gordon's basic valuation, what will be
price of the share when
dividend payout is 25%and 60%.