Professional Documents
Culture Documents
6 per share having capitalisation rate of 10 per cent and has a return
investment at the rate of 20 per cent. According to Walter’s model, what should be the price
share at 30 percent dividend payout ratio? Is this the optimum payout ratio as per Walter mod
𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒
𝑃=(1.8+(6−1.8)∗0.2/0.1)/0.1
𝑃=(1.8+(4.2∗2))/0.1
𝑃=𝑅𝑠.102
𝑃=𝑅𝑠.120
10 per cent and has a return on
el, what should be the price per
yout ratio as per Walter model ?
ayout Ratio = D / E
Q.2. Earnings per share of Quick Ltd. is Rs. 8 and the Capitalisation rate is 10%. The Com
following options;
a) Dividend payout 50% b) Dividend payout 75% c) Dividend payout 100%
What should be the price per share according to Walter’s model under the following
a) When the return is 15% b) When the return is 10% c) When the return is 5%
E=8
Ke = 10%
a) r = 15% = 0.15 b) r = 10% = 0.10
Ke = 10% = 0.10 Ke = 10% = 0.10
𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒 𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒
a) D = 50% * 8 = 4
𝑃=(4+(8−4)∗0.15/0.10)/0.10 𝑃=(4+(8−4)∗0.10/0.10)/0.10
P = 100 P = 80
P = 90 P = 80
P = 80 P = 80
rate is 10%. The Company has
c) r = 5% = 0.05
Ke = 10% = 0.10
𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒
𝑃=(4+(8−4)∗0.05/0.10)/0.10
P = 60
𝑃=(6+(8−6)∗0.05/0.10)/0.10
P = 70
P = 80
Q.3. The Earning per share of a company is Rs. 10. It has an internal rate of return of 15% and the
capitalization rate of risk class is 12.5%. If Walter’s model is used-
a) What should be the optimum payout ratio of the firm?
b) What should be the price of a share at this payout?
c) How shall the price of a share be affected if different payouts were employed?
b) 𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒
𝑃=(0+(10−0)∗0.15/0.125)/0.125
𝑃=96
𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒 𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒
𝑃=(5+(10−5)∗0.15/0.125)/0.125 𝑃=(10+(10−10)∗0.15/0.125)/0.125
𝑃=88 𝑃=80
The Price of share will decrease or will be less if any other payout ratios were employed.
of return of 15% and the
ere employed?
price will be
125)/0.125
Q.4. The following information pertains to ABC Ltd.
Earnings of the Company 12,00,000
Dividend Payout ratio 60%
No. of shares outstanding 2,00,000
Equity capitalization rate 12%
Rate of return on investment 16%
(i) What would be the market value per share as per Walter’s model?
(ii) What is the optimum dividend payout ratio according to Walter’s model and the market
value of Company’s share at that payout ratio?
𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒
D = Dividend per share = 6 * 60% = 3.6
E = Earnings per share = Rs. 12,00,000 / 2,00,000 = 6
r = Rate of Return (IRR) = 16% = 0.16 𝑃=(0+(6−0)∗0.16/0.12)/0.12
Ke = Cost of Capital = 12% = 0.12
𝑃=(3.6+(6−3.6)∗0.16/0.12)/0.12 𝑃=66.67
P = 56.67
odel?
ter’s model and the market
e, the optimum dividend payout is 0%, accordingly the Market price will be
6/0.12)/0.12
Q.5. The following figures are collected from the annual report of Anand Ltd.:
Net Profit after tax 30 lakhs
Outstanding 12% preference shares 100 lakhs
No. of equity shares 3 lakhs
Return on Investment 20%
Cost of Capital 14%
What should be the approximate dividend pay-out ratio so as to keep the share price at Rs. 52 by
using Walter model?
𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒 EPS = 6
r = 20% = 0.2
Ke = 14% = 0.14
52=(𝐷+(6−𝐷)∗(20%)/(14%))/(14%) P = 52
DPR = ???
D = 3.02
EAT 3,000,000
- PD 1,200,000
PAES 1,800,000
EPS (E) 6
P = 30
Walter Gordon MM
𝑃=(𝐷+(𝐸−𝐷)∗𝑟/𝐾𝑒)/𝐾𝑒 𝑃=𝐸(1−𝑏)/(𝐾𝑒−𝑏𝑟) 𝑃𝑜=((𝐷1+𝑃1))/(1+𝐾𝑒)
𝑃=𝐸(1−𝑏)/(𝐾𝑒−𝑏𝑟) EPS = 5 P = 50
Ke = 16% = 0.16
DPR = 40% = 0.4
50=5(1−0.6)/(0.16−(0.6∗𝑟)) b = Retention ratio = 1 - 0.4 = 0.6
r = Rate of return = ???
50=2/(0.16−0.6𝑟)
r = 0.2
r = 20%
Q.7. The following figures are collected from the annual report of Anand Ltd.:
Net Profit after tax 50 lakhs
Outstanding 10% preference shares 100 lakhs
No. of equity shares 2.5 lakhs
Return on Investment 20%
Cost of capital 16%
Retention Ratio 60%
Calculate the market price per share using Gordon’s formula.
Calculation of EPS
Net profit after tax 5,000,000
Less: Preference Dividend 1,000,000
Profit for Equity shareholders 4,000,000
No of Equity shares 250,000
EPS (E) 16
r = 20% = 0.20
𝑃=𝐸(1−𝑏)/(𝐾𝑒−𝑏𝑟)
Ke = 16% = 0.16
b = 60% = 0.60
𝑃=16(1−0.60)/(0.16−(0.60∗0.20))
𝑃=6.4/(0.16 −0.12)
MP = 160 𝑃=6.4/0.04
P = 160
and Ltd.:
Q.8. Panna Ltd., has 8 lakh equity shares outstanding at the beginning of the year. The current market
price per share is Rs. 120. The Board of Directors of the company is contemplating Rs. 6.4 per
share as dividend. The rate of capitalisation, appropriate to the risk-class to which the company
belongs, is 9.6%:
(i) Based on M-M Approach, calculate the market price of the share of the company, when the
dividend is – (a) declared; and (b) not declared.
(ii) How many new shares are to be issued by the company, if the company desires to fund an
investment budget of Rs. 3.20 crores by the end of the year assuming net income for the year
will be Rs. 1.60 crores?
120=((6.4+𝑃1))/(1+9.6%) 120=((0+𝑃1))/(1+9.6%)
150=((8+𝑃1))/(1+12%) 150=((0+𝑃1))/(1+12%)
150*1.12 = 8 + P1 150*1.12 = 0 + P1
P1 = 160 P1 = 168
ning of the accounting year 2014. The
of directors of the company has
isation, appropriate to the risk-class to
ller Approach, calculate the market price of
(a) declared; and (b) not declared.
at the end of the accounting year on the
the investment budget is Rs. 4 crore when
nds are not declared.
unting year will remain the same whether