Independent directors, how many subsidaries (listed/non listed)

you should be analytical

Directors are from the same family
corporate governance
intro should be concise and analytical

Word doc mein inference and analyitical

Excel mein working notes

 Note:

D
21-22
F/S
Payment of dividend not mandatory
Dicision taken by
BOD Shareholders
propose approve

Types of Dividend
Final Dividend paid for the year but after the year
Interim dividend paid during the year based on quaterly or half yearly performance, c
regular means total dividend distributed across the year
irregular dividend is paid on seasonal performance basis
Note: technically regular and final dividend are one and the same thing
special year of exceptional profit (will be announced alag se)
liquidating dividend paid out of proceeds from sale of operations

Forms of dividend (manner of giving dividend)

Cash
stock- bonus issue

Metrics

Dividend rate expressed as a % of face value, only for inference purpose

Div payout DPS/EPS Whatever they have earned uska % is the dividend
Retention rate: 1-D/P (calculates retained earnings)

Div Yield DPS/MPS If today market price is rs100 and Div yield is 10%, then I will get R

Total return stoct return[ market price appreciation-( p1-p0)/p0)+ Dividend return]

Dividend Policies

1) Constant DPS Reserve is required, DPS is constant

Stable, maturing company
 D/P Fluctuates

even when companies are earning high profits then also dividend remains the same, there is no concept of sp

yr EPS DPS
1 100 10
2 200 10
3 50 10

2) Constant D/P

D/P constant
DPS fluctuate
Reserve not reqd
High earnings lead to high Dividend

yr EPS D/P DPS

1 100 10% 10
2 200 10% 20
3 50 10% 5

3) Stable dividend policy / Managed dividend policy

coined in 1950s by Lintner

Inc or dec in DPS is adjusted over time

Implied promise of payment- If a company starts paying dividends then it can't stop doing that

yr EPS DPS
1 100 10
2 200 10+15 (15 will be special dividend)
3 50 10

4) Residual Policy

Earnings x
(-) Capex x
(-) other Exp xx
Dividend x

Dividend Timeline
Declaration date: it is the date on which AGM approves the dividend
Ex- dividend date(2-3 days b4 record date): Stock exchange declares a date by which you should purchase the
 Record date: In order to get the dividend the share should be in your demat A/C

When the co. pays dividend cash reduces, asset reduces bcz of which book value reduces and therefore mark

Berkshire Hathway Case study

Reasons for no dividend

1) Organic & Inorganic Growth

2) Investor Preference: Every investor has different needs some need Rs 5, some need Rs 10and if the actual div

4) Home made dividend Substitution of dividend inc with sale proceeds

Determinants and Constraints/ F

Internal
Legal
Shareholder
Macro

Internal
Future plans/ Growth/ Capex
Earnings- Stability & Amt
Liquidity-
MGT Outlook/Risk
Historical Trend-
Debt obligations-
(If in one of the year a huge profit comes toh esa nhi hai ki tumhe
Cashflow affected bcz of this interim dividends are given
what kind of BODs are there in the company want to give dividend or take risk
have to see amount of dividends given in previos years
int payments/ pref div payments , principal repayments should be done befor

Legal
Sources-> CY Profits, PY profits, Central Govt money
(konsa paisa use krskta ho for dividend payment)

Appropriation rules-> PY Profit

-> CY div rate should be less that or equal to avg of past 3 years div rate
-> Amt withrawn should be less that or equal to 10% of (paid up cap+ R&S)
-> Balance in R&S after withdrawl greater that or equal to 15% of paidup cap

Prohibition rules
-> No dividend-> No payment of interest or preference dividend
-> no div. if payment of debt principal not done
 Payment rules

Declaration Date
Within 5 Days-> dividend amt to be transferred to a separate bank a/c

30 Days-> Payment Prep (30 Days after 5 days)

Dividend warrant
ECS (Electronically Clearing System)

7 days-> Payment
- Post Dividend Warrant
- Executes ECS

7 years-> Claim Dividend

After 7 years-> unclaimed Dividend goes to Investor Education & Protection Fund (IE&PF) -> Run by SEBI

SEBI rules dividend Distribution disclosure policy mandatory for listed companies

3) Shareholder Consideration Info is infered from the com

1) -> Info Signaling Asymmetric Info -> Shareholders and BOD have gap in information which lead
-> Div payment payment-> Growing co.
-> Start divd payment -> Mature Co.
-> Stops Divd payment -> Financial distress

2) Bird in Hand
-> Gordon one bird in hand Dividend
is better
than two birds in bushes Project cap growth( risk is there)

Clientelle Theory
-> Dividend policy attracts shareholders of similar needs

-> Aversion to regret (FOMO)

-> Dividend or selling share
-> Sell Shares -> lose future entitlements -> bonus, dividend, rights
-> shareholders don’t want to regret losing those entitlements and so don’t w
 -> shareholders prefer divd

-> Agency Cost

Lack of faith in BOD that is why quarterly reports and many more things are th
BOD in remuneration & pay with the divd amt (you have to pay to shareholde

-> Catering Theory

inc in the price of the company bcz it pays dividend is dividend premium
As there are more people who want dividend
-> Investor preference is the key factor

Macro
-> Competition/ Industry trend
If in the same industry majority of the companies are paying divd then you ha

-> Inflation->-->>>Divd (Indirect

inflation does not have directly affect the divd but it affects the co.s earnings which affects the dividends

Taxation -> SH consideration

Before Apr-20
DDT DDT was abolished
Co pay tax on divd Divd is taxable for investors
Divd was tax free for investors

Dividend & Value

Relevance
(Gordon)

(Value of equity) Ve =D1/(Ke-g)

D1- Exepected dividend
Ke- Cost of equity
g- growth rate = Retention rate* rate of return

value of today is determined by the future dividends

PV Perpetuity= Annuity-> D 1)
i Ke 2)
i-> interest rate
 Growing perpetuity =A ->> D1
i-g Ke-g

Bonus Shares
Reserve and surplus funds are converted into share capital
Bonus share-> Stock dividend

No. of shares given

Total no. of shares held
Bonus- 1:1
Eq share cap l lakh*10= 10L
R&S= 30L Eq Share cap
Equity/ BV= 40L 2 lakh*10 20L
R&S 20L
Book value per share (BVPS)= 40/2=20 BV 40L

BVPS= 40/2
MPS= 100
Mcap= 100L MPS= 100L/2L=

M-CAP 100L

Stock Split
Eq sh cap 2L*5= 10L
R&S 30L
BV 40L

FV Changes in SS

Bonus & SS is for active trading

Impact of Bonus Share on MPS

i) Announced ii) Ex- bonus iii) Long term effect
BOD notice for meeting
(agendas for the meeting)
 Adjustment Value premium

MPS is
falling bcz
of
adjustme
Approved in the BOD Meeting nt people are ready to pay a bit more price bcz

Notice for AGM

Approval in the AGM

Announcement is treated as
Positive signal

Expected demand from retail investors

when you feel by decrease in

market price after bonus, it
will lead to demand from retail
investors

Buy Back/ Share Repurchase

Repurchased shares are cancelled
10000 Sh@30/sh
Eq sh cap
1L*10= 10L (-) 10k*10 (F.V) 9L
R&S 30L (-) 10K*20(Premium)28L
40L 37L
BV reduces
Book value reduces by the buy back amt

Buy back has no timeline, no adjustment Buyback-> Value additive- Depends on sourc
An open offer is for every shareholder
and tender offer is for specific institutions or particular investors

Reason for buyback

if a company buy a sufficient sum of shares it can get delisted
Takeover defence strategy: tender offer can be given to hostile aquirer to escape the takeover

Open buy back offer gives the market to sell the shares if there is no demand for the share in the market

Buyback of shares is better than dividend bcz in buyback you get something in return

favourable Unfavourable
 Funds-> Idle cash balance Ke> Return on idle cash Ke< Return on idle cash

for ex idle cash can be in bank or mf and if cost of equity is greater than return on idle cash then you should b

Funds-> Debt Ke> Kd Ke< Return on idle cash

A loan is at less interest than cost of equity so you buyback by taking loans

Analysis on Dividend safety

-> ability of a company to continue to make dividend payments

-> Dividend risk score

Dividend Payout DPS/EPS more than 80% reserves and surplus and R.E is drastically reduced

Dividend Coverage Earnings Ability to pay dividends, higher the ratio better for the
Dividend

FCFE Coverage FCFE Cash generated from operation which is available for e
(Free cash flow to equity) Divd+ Sh repurchase Earnings is book flow and it is cash for equity sharehold
Higher the ratio better for the company

How to calculate FCFE

From CFS
Cash flow from op act x
(-) Capex (x) -> Purcahse of PPE (Property,plant & Equipment)
(+) Debt raised x
(-) Debt Repaid (x) -> Deduct the interest also if not deducted from CF from op act
FCFE

Dividend Investing
Dividendd Kings Increases dividend payout consistently for past 50 years

Dividend Aristocrats S&P 500 + Increases Dividend payout consistently for more than 25yrs

Dividend champions increases dividend payout consistently for more than 25 yrs

Dividend Contendors increases divd payout consistently for past 10 to 24 years

Dividend Achievers Increases divd payout consistently for past 10 years

Dividend Challengers Increases dividend payout consistently for past 5 to 9 years

Selection of Stock
i) Economy screener
ii) Market Screener ->> what companies are you looking for like large cap, mid or small cap co.s
Trading Value- check if regular trading is done so that when you want to sell y

iii) Fundamental screener ROE>…... Make sure the company is a healthy company and fundamentaly s
Sales Growth Rate>…..
Earnings Volatility<….

iv) Strategy Dividend investing strategy/ Income Strategy

-> Divd Payout
-> Divd Yeild
-> Divd Growth Rate
Divd Kings, Aristocrats
Divd risk score
-> Divd Sustainability

You can also consider factors like quality -> Busing qualities stock at a good pr
Value-> Target those companies which has price to book ratio less than 1 whic
Impact-> ESG
Volatility-> Beta

Out of course
Quality Investing
Piotroski Fsane- -> Financial Evaluation
Altman Z score
Ohlson O Score ->Insolvency Prediction
Benish Mscore
Montier Cscore
Sloan Ratio -> Earnings Mgt
 R.E is in the reserve and surplus under other equity

E( earnings)

R.E 90K- CFS

1 Lakh 10K-B/S-Liability (not used R.E)
SOCE( Statement of Changes and Equity)
end not mandatory

Shareholders

r half yearly performance, can be regular or irregular

are one and the same thing

it is a kind of irregular interim or final dividend

DPS- Dividend per share

the dividend EPS- Earnings per share If div payout is more than 100% then you are taking historical profits which means

MPS- Market price per share

yield is 10%, then I will get Rs10 as dividend

0)+ Dividend return]

me, there is no concept of special dividends in this policy

op doing that

ich you should purchase the stock so that stock exchange can settle that in your demat
 educes and therefore market price also decreases

ed Rs 10and if the actual div is Rs 2 then no one's need is achieved so therefore dividend should not be given

d Constraints/ Factors that affect your dividend dicision

mes toh esa nhi hai ki tumhe dividend dena hai iss year

to give dividend or take risk instead of giving dividemd

ments should be done before dividends to equity shareholders

of past 3 years div rate

0% of (paid up cap+ R&S)
equal to 15% of paidup cap (ensures sufficient funds)

rence dividend
(IE&PF) -> Run by SEBI

Info is infered from the companies activities

ap in information which leads to shareholders percieving information in the form of signals

th( risk is there)

, dividend, rights
entitlements and so don’t want to sell shares
and many more things are there
u have to pay to shareholders also if the BOD wants to increase their shares, there is a causal relationship

d is dividend premium

are paying divd then you have to pay

h affects the dividends

Irrelevance
(M-M)

Value of co. comes from operations which are the results of the investment decision

both the financing and dividend decision is irrelevant

it doesn’t matter where the money comes from but where you investing/using is important

P1=Po(1+Ke)-D P1- Expected MPS

Po- Current MPS
Assumption Ke- cost of equity
r= Ke D- Dividend
Perfect Cap market
-> Symmetric Info -> equal information b/w BOD & Shareholders
 -> Rational investor
-> No taxes and charges

No. of shares given

Total no. of shares held

Total BV AND MCAP Remains same

but BVPS & MPS Changes

Timeline in bonus share is same as dividend timeline of ex date and record date

20

50

on MPS
 to pay a bit more price bcz they are expecting bonus from the company

ces by the buy back amt

additive- Depends on source of funds

the takeover

he share in the market

 idle cash then you should buyback the shares

nd R.E is drastically reduced therefore the ability of the company to handle drastic shocks is also reduced

her the ratio better for the company

tion which is available for equity shr holders

t is cash for equity shareholders
he company

& Equipment)

ucted from CF from op act

for more than 25yrs

mid or small cap co.s
hat when you want to sell you can sell it easily

ompany and fundamentaly strong

qualities stock at a good price,

o book ratio less than 1 which means they are undervalued and you can buy a stock at cheap price and sell at higher price
historical profits which means profit of previous years
t higher price
Dividend concepts & theories
1. M/s Samar Pvt Ltd. earned a PBT of Rs. 84,00,000 for the year ended 31 March 2017.
Corporate tax rate was 30%. Their issued share capital comprised 1 lakh shares of Rs. 10
each, fully paid up. Management decided to payout a total dividend of Rs. 30,00,000 this
year. The shares of the Company were trading at Rs. 140 per share at the balance sheet
date. Compute the dividend rate, dividend yield and dividend pay-out.

2. TeliaSonera AB is the leading provider of telecommunication services in Sweden and

Finland. TLSN’s financial data are reported in Swedish krona (SEK). In October 2007,
TLSN’s board of directors modified its dividend policy, stating:
“The company shall target a solid investment grade long-term credit rating (A– to BBB+)
to secure the company’s strategically important financial flexibility for investments in
future growth, both organically and by acquisitions. The ordinary dividend shall be at least
40% of net income attributable to shareholders of the parent company. In addition, excess
capital shall be returned to shareholders, after the Board of Directors has taken into
consideration the company’s cash at hand, cash flow projections and investment plans in a
medium-term perspective, as well as capital market conditions.”
The earnings and dividend details for 2007 & 2008 are as follows:
2007: EPS was Rs. 3.94 and DPS was 4.00
2008: EPS was Rs. 1.8 and DPS was 4.23
Calculate the dividend pay-out for 2007 & 2008. Also identify the amount of special
dividend in both the years.

3. Last year Luna Inc. had earnings of US$2.00 a share and paid a regular dividend of
US$0.40. For the current year, the company anticipates earnings of US$2.80. It has a 30%
target payout ratio and uses a 4-year period to adjust the dividend. Compute the expected
dividend for the current year.

4. Two companies X ltd. and Y ltd. are in the FMCG industry with identical EPS for the
last 5 years. X ltd. There is disparity between the market prices of the shares of the two
companies. The market price of X ltd. is generally lower than Y even if X pays more
dividend than Y ltd. The details are entailed in the table below:-
EPS(Y DPS (X DPS (Y MPS (X
Year EPS (X ltd.) MPS (Y ltd.)
ltd.) ltd.) ltd.) ltd.)
1 4 4 1.6 1.8 12 13.5
 2 1.5 1.5 0.6 1.8 8.5 12.5
3 5 5 2 1.8 13.5 12.5
4 4 4 1.6 1.8 11.5 12.5
5 8 8 3.2 1.8 14.5 15

(a) Identify the dividend policy followed by both the companies. A)

(b) Identify reasons for the market price disparity.

C) Change the dividend policy to co
(c) What can be done by X ltd. to increase the market price.

5. Udhavji Ltd follow residual theory of dividend. In the year just ended, they have made a
net profit of Rs.6,00,000. Their debt equity ratio is 1.50 and they want to maintain it.
What is the maximum amount they can invest in a project without issuing new equity shares?
Suppose they have decided to invest in a project requiring an initial investment of Rs.12,00,000, can they pay dividend; if yes,

Project 1200000
Equity 480000 (1200000*1/2.5)
Debt 720000 (1200000*1.5/2.5)

Earnings= 600000
(-) Equity Project 480000 (Capex)
Dividend 120000

Dividend Models

6. The earnings per share of a company is Rs.10 and the rate of capitalisation applicable to
it is 15 per cent. The company has 2 options of paying dividend i.e. (i) 50 %,( ii) 75%.
Calculate the market price of the share as per Gordon’s model if it can earn a return of (a)
20, (b) 15 and (c) 10 per cent on its retained earnings.

7. Starlight Limited is having its shares quoted in major stock exchanges. The company
distributed dividend at the rate of 20% per annum. The paid-up shares capital of the
company consists of 10 lakh shares of 10 each. Annual growth rate in dividend expected
is 2%. The cost of equity is 15%. Calculate the value of Starlight Limited's share based on
Gordon’s' model.
8. The equity share of Vishakha Ltd currently sells at Rs.90. The expected EPS is Rs.18. The
company follows a pay-out ratio of 60%. The rate of return is 20%. What is the cost of
equity? Will the market price change if the company announces 100% pay-out ratio? Use Gordon Model

9. A company belongs to a risk class of which appropriate capitalization rate is 10 per cent.
It currently has 1, 00,000 shares selling at Rs.100 each. The firm is contemplating the
declaration of a dividend of Rs.6 per share at the end of current. Fiscal year, which has
just begun. Answer the following questions on the basis of MM model. 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? Assuming that the firm pay dividend, has net income of Rs.10, 00,000 and
makes new investment of Rs.20, 00,000. Show, how the M-M approach affects the value
of firm if the dividends are paid or not paid.

10. ABC Ltd. has 50,000 outstanding shares. The current market price per share is Rs.100
each. It hopes to make a net income of Rs.5, 00,000 at the end of current year. The
Company’s Board is considering a dividend of Rs.5 per share at the end of current financial
year. The company needs Rs.10, 00,000 for approved investment expenditure. The
company belongs to a risk class for which the capitalization rate is 10%. Show, how the
M-M approach affects the value of firm if the dividends are paid or not paid.

Share Repurchase
11. Takemiya Industries, a Japanese company, has been accumulating cash in recent years with
a plan of expanding in emerging Asian markets. Takemiya’s management and directors
believe that such expansion is no longer practical, and they are considering a share
repurchase using surplus cash. Takemiya has 10 million shares outstanding, and its net
income is ¥100 million. Takemiya’s share price is ¥120. Cash not needed for operations
totals ¥240 million and is invested in Japanese government short-term securities that earn
virtually zero interest. For a share repurchase program of the contemplated size,
Takemiya’s investment bankers think the stock could be bought in the open market at a ¥20
premium to the current market price, or ¥140 a share. Calculate the impact on EPS if
Takemiya uses the surplus cash to repurchase shares at ¥140 per share

12. Jensen Farms, Inc., plans to borrow US$12 million, which it will use to repurchase shares.
The following information is given:
Share price at time of share repurchase = US$60
Earnings after tax = US$6.6 million
EPS before share repurchase = US$3
Price/Earnings ratio (P/E) = US$60/US$3 = 20
Earnings yield (E/P) = US$3/US$60 = 5% -> ke
Shares outstanding = 2.2 million
Planned share repurchase = 200,000 shares
 Calculate the EPS after the share repurchase, assuming the after-tax cost of borrowing
is 5%.
 Calculate the EPS after the share repurchase, assuming the company’s borrowing rate
increases to 6% (after tax)
 Calculate the EPS after the share repurchase, assuming the company’s borrowing rate
increases to 3% (after tax)

13. The market price of both Company A’s and Company B’s common stock is US$20 a
share, and each company has 10 million shares outstanding. Both companies have
announced a US$5 million buyback. The only difference is that Company A has a market
price per share greater than its book value per share, whereas Company B has a market
price per share less than its book value per share:
Company A has a book value of equity of US$100 million and BVPS of US$100
million/10 million shares = US$10. The market price per share of US$20 is greater than
BVPS of US$10.
Company B has a book value of equity of US$300 million and BVPS of US$300
million/10 million shares = US$30. The market price per share of US$20 is less than BVPS
of US$30.
Calculate the impact of the buy back on the book value pe share of both the companies
14. Waynesboro Chemical Industries, Inc. (WCII) has 10 million shares outstanding with a
current market value of $20 per share. WCII’s board of directors is considering two ways
of distributing WCII’s current $50 million free cash flow to equity. The first method
involves paying an irregular or special cash dividend of $50 million/10 million = $5 per
share. The second method involves repurchasing $50 million worth of shares. For
simplicity, we make the assumptions that dividends are received when the shares go exdividend
and that any quantity of shares can be bought at the market price of $20 per share.
We also assume that the taxation and information content of cash dividends and share
repurchases, if any, do not differ. How would the wealth of a shareholder be affected by
WCII’s choice of method in distributing the $50 million?

Dividend Safety
15. Potash produces fertilizer and agricultural chemicals from its operations in Canada, the
United States, South America, and the Middle East, which it sells globally. The company
has paid dividends since 1990. Below Exhibit shows financial information for the
company.
2012 2013 2014 2015
Net Income 2079 1785 1536 1270
Cash Flow from operations 3225 3212 2614 2338
Capex 2133 1624 1138 1217
Net borrowings -462 -153 303 -27
Dividend paid 467 997 1141 1204
Stock Repurchases 0 411 1065 0
FCFE 630 1435 1779 1094

 Using the above information, calculate the following for 2012, 2013, 2014, and 2015:
Dividend payout ratio, Dividend coverage ratio, FCFE coverage ratio
 On the basis of the trends of the above calculated metrics, discuss the sustainability of
Dividend and repurchase policy
Dividend rate= DPS/ face value 300%

Div yield DPS/MPS 21.43%

DPS= 30

Div payout DPS/EPS 51.02%

PAT= 5880000
EPS= 58.8

2007 2008
EPS 3.94 1.8
Target div 1.576 0.72
DPS/Actual Div 4 4.23
Spl Div 2.424 3.51
DIV/Payout 101.52% 235.00%

Current div= 0.4

Target div 0.84 (2.8*30%)

0.4…...0.84
yearly change= 0.11

0 1 2 3 4
0.4 0.51 0.62 0.73 0.84

D/P of X

0.4
 0.4
0.4
0.4
0.4

For X Its constand D/P policy B) Fluctuating DPS leads to investor financial planning difficult, stock unappealing to the in
Y- Constant DPS

nge the dividend policy to constant DPS or stable policy

D/E=1.5
D= 1.5
6
n they pay dividend; if yes, amount of dividend? D= 9

Equity is same as shareholdersfund or profit

fficult, stock unappealing to the investor which leads to demand of stock falls and MPS falls
7. Starlight Limited is having its shares quoted in major stock exchanges. The company
distributed dividend at the rate of 20% per annum. The paid-up shares capital of the
company consists of 10 lakh shares of 10 each. Annual growth rate in dividend expected
is 2%. The cost of equity is 15%. Calculate the value of Starlight Limited's share based on
Gordon’s' model.

Do= 20% of 10 =2

D1 =D0(1+g)
2(1+2%)
2.04

Ve= =2.04 15.69231

15%-2%
Dividend Models

6. The earnings per share of a company is Rs.10 and the rate of capitalisation applicable to
it is 15 per cent. The company has 2 options of paying dividend i.e. (i) 50 %,( ii) 75%.
Calculate the market price of the share as per Gordon’s model if it can earn a return of (a)
20, (b) 15 and (c) 10 per cent on its retained earnings.

EPS 10
Ke 15%
D/P-> 50% 75%
DPS(D1) -> 5 7.5
Retention rate 50% 25%

Sharehold
ers want
15% but
is earning
20% then
it is better
to keep
the
money
r 20% 100 75 r>Ke with Co. Inverse relationship dividend

r 15% 66.6666666666667 66.66667 r=ke Indifference

Company
is not
performin
g as per
expectati
on so its
better to
pay
r 10% 50 60 r<Ke dividend Direct relationship b/w divid
Inverse relationship dividend and value- if co. pays more dividend then it loses value so it's better to keep money with the company

Direct relationship b/w dividend value

money with the company
8. The equity share of Vishakha Ltd currently sells at Rs.90. The expected EPS is Rs.18. The
company follows a pay-out ratio of 60%. The rate of return is 20%. What is the cost of
equity? Will the market price change if the company announces 100% pay-out ratio? Use Gordon Model

1st part
EPS= 18
D/P 60%
DPS(D1) = 10.8
Retained r 40%
Ve= D1/ke-g

g= 8.00% 40%*20%

po= 90

Ke= D1 +g
Po

Ke 20.0%

Ve= 90

r=ke-> Value will not change(same as in the last question)

9. A company belongs to a risk class of which appropriate capitalization rate is 10 per cent.
It currently has 1, 00,000 shares selling at Rs.100 each. The firm is contemplating the
declaration of a dividend of Rs.6 per share at the end of current. Fiscal year, which has
just begun. Answer the following questions on the basis of MM model. 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? Assuming that the firm pay dividend, has net income of Rs.10, 00,000 and
makes new investment of Rs.20, 00,000. Show, how the M-M approach affects the value
of firm if the dividends are paid or not paid.

Dividend is paid No dividend

1. P1=Po(1+Ke)-D 104 110
=100*(1+10%)-6 =100*(1+0.1)
2. Dividend amt 600000
no. of share* DPS =6*100000

3. Retained Earnings 400000 1000000

Earnings- Dividend =1000000-F15

4. Money Req 1600000 1000000

Invest- Retain earnings =2000000-400000=2000000-1000000

5. new shares to be issued 15384.61538462 9090.909

Money req/ P1 =F21/F13

6. Value of Co. 12000000 12000000

Total Share*P1
10. ABC Ltd. has 50,000 outstanding shares. The current market price per share is Rs.100
each. It hopes to make a net income of Rs.5, 00,000 at the end of current year. The
Company’s Board is considering a dividend of Rs.5 per share at the end of current financial
year. The company needs Rs.10, 00,000 for approved investment expenditure. The
company belongs to a risk class for which the capitalization rate is 10%. Show, how the
M-M approach affects the value of firm if the dividends are paid or not paid.

Dividend is paid No dividend

1. P1=Po(1+Ke)-D 105 110

2. Dividend amt 250000

no. of share* DPS

3. Retained Earnings 250000 500000

Earnings- Dividend

4. Money Req 750000 500000

Invest- Retain earnings

5. new shares to be issued 7142.85714285714 4545.455

Money req/ P1

6. Value of Co. 6000000 6000000

Total Share*P1
Share Repurchase
11. Takemiya Industries, a Japanese company, has been accumulating cash in recent years with
a plan of expanding in emerging Asian markets. Takemiya’s management and directors
believe that such expansion is no longer practical, and they are considering a share
repurchase using surplus cash. Takemiya has 10 million shares outstanding, and its net
income is ¥100 million. Takemiya’s share price is ¥120. Cash not needed for operations
totals ¥240 million and is invested in Japanese government short-term securities that earn
virtually zero interest. For a share repurchase program of the contemplated size,
Takemiya’s investment bankers think the stock could be bought in the open market at a ¥20
premium to the current market price, or ¥140 a share. Calculate the impact on EPS if
Takemiya uses the surplus cash to repurchase shares at ¥140 per share

Amt 240 Million

Offer price 140 /share
Buyback share 1.714286 Million
net income
Existing shares 10 Million 100 10 <- EPS B4 buyback
Shares after buyb 8.285714 100 12.06897 <- EPS After buyback

EPS Increased -> Buyback added value

Note net income would have been revised if the cash earned interest
12. Jensen Farms, Inc., plans to borrow US$12 million, which it will use to repurchase shares.
The following information is given:
Share price at time of share repurchase = US$60
Earnings after tax = US$6.6 million
EPS before share repurchase = US$3
Price/Earnings ratio (P/E) = US$60/US$3 = 20
Earnings yield (E/P) = US$3/US$60 = 5% -> ke
Shares outstanding = 2.2 million
Planned share repurchase = 200,000 shares
 Calculate the EPS after the share repurchase, assuming the after-tax cost of borrowing
is 5%.
 Calculate the EPS after the share repurchase, assuming the company’s borrowing rate
increases to 6% (after tax)
 Calculate the EPS after the share repurchase, assuming the company’s borrowing rate
increases to 3% (after tax)

E/P-> Cost of equity/ Return on shares

bcz no. of shares- buyback 0.2 Million

Offer price-> MPS 60 / sh
Buyback amt 12 amt of debt

No. of
shares( a
fter
Int rate Earnings (after buyback) buyback) EPS( After buyback)
5% 6 2 3 =Current EPS (3)
<- Value neutral

6% 5.88 2 2.94 < Current EPS (3)

<- Value decreased

3% 6.24 2 3.12 > Current EPS(3)

<- Value increased

Note: if multiple sources of funding has been used for buybackThe net income will be revised with the int income
 Ke=Kd

Ke<Kd

Ke>Kd

sed with the int income lost on the ideal cash and interest exp on debt
13. The market price of both Company A’s and Company B’s common stock is US$20 a
share, and each company has 10 million shares outstanding. Both companies have
announced a US$5 million buyback. The only difference is that Company A has a market
price per share greater than its book value per share, whereas Company B has a market
price per share less than its book value per share:
Company A has a book value of equity of US$100 million and BVPS of US$100
million/10 million shares = US$10. The market price per share of US$20 is greater than
BVPS of US$10.
Company B has a book value of equity of US$300 million and BVPS of US$300
million/10 million shares = US$30. The market price per share of US$20 is less than BVPS
of US$30.
Calculate the impact of the buy back on the book value pe share of both the companies

A B
BV 100 300
No. of share 10 10 mil
BVPS 10 30 /Shr
MPS 20 20
MPS>BVPS MPS<BVPS

Buyback Amt 5 5 million

no. of shares- BB 0.25 0.25 million

BV (after BB) 95 295

No. of shares (After BB) 9.75 9.75
BVPS (After BB) 9.7435897436 30.25641
< Current BVPS > Current BVPS
Values dec value inc
When a co. buybacks its book value reduces by the same amt of BB

note: BB Allows undervalued stocks to unlock value

14. Waynesboro Chemical Industries, Inc. (WCII) has 10 million shares outstanding with a
current market value of $20 per share. WCII’s board of directors is considering two ways
of distributing WCII’s current $50 million free cash flow to equity. The first method
involves paying an irregular or special cash dividend of $50 million/10 million = $5 per
share. The second method involves repurchasing $50 million worth of shares. For
simplicity, we make the assumptions that dividends are received when the shares go exdividend
and that any quantity of shares can be bought at the market price of $20 per share.
We also assume that the taxation and information content of cash dividends and share
repurchases, if any, do not differ. How would the wealth of a shareholder be affected by
WCII’s choice of method in distributing the $50 million?

Assume: I have 1 share of the co.

Dividend
Cash 5
Share 15
Value 20

Buyback : sells the share

Cash 20
Share 0
Value 20

BB : Didn’t sell the shares

Cash 0
Share 20
Value 20
Dividend Safety
15. Potash produces fertilizer and agricultural chemicals from its operations in Canada, the
United States, South America, and the Middle East, which it sells globally. The company
has paid dividends since 1990. Below Exhibit shows financial information for the
company.
2012 2013 2014 2015
Net Income 2079 1785 1536 1270
Cash Flow from operations 3225 3212 2614 2338
Capex 2133 1624 1138 1217
Net borrowings -462 -153 303 -27
Dividend paid 467 997 1141 1204
Stock Repurchases 0 411 1065 0
FCFE 630 1435 1779 1094

 Using the above information, calculate the following for 2012, 2013, 2014, and 2015:
Dividend payout ratio, Dividend coverage ratio, FCFE coverage ratio
 On the basis of the trends of the above calculated metrics, discuss the sustainability of
Dividend and repurchase policy

Dividend Payout DPS/EPS 2012

Net Income 2079
Dividend Coverage Earnings Cash Flow from operatio 3225
Dividend Capex 2133
Net borrowings -462
FCFE Coverage FCFE Dividend paid 467
Divd+ Sh repurchase Stock Repurchases 0
FCFE 630
Dividend payout 22.46%
Divd Coverage 4.45182
FCFE Coverage 1.349036

In the last year FCFE is 1094 and the ompany is paying 1200 as divd, so it is very unsustainable
bcz of the high divd payout and low coverage ratios the dividend policy is unsustainable
 2013 2014 2015
1785 1536 1270
3212 2614 2338
1624 1138 1217
-153 303 -27
997 1141 1204
411 1065 0
1435 1779 1094
55.85% 74.28% 94.80%
1.790371 1.346188 1.054817
1.019176 0.806437 0.908638