Exercises

1. RAD Ltd. currently has 500,000 equity shares outstanding. Current market price per share is
br. 100. The net income for the current year is br. 30,000,000 and investment budget is br.
40,000,000. Cost of equity is 10%. The company is contemplating declaration of dividends @ br.
8 per share. Assuming MM approach

i) Calculate market price per share if dividend is declared and if it is not declared.

ii) How many equity shares are to be issued under both the options?

2. Assuming that cost of equity is 12%; dividend growth rate is 8%; and earnings per share is br.
10. Assuming expected dividend payout ratio of 25%, calculate the following by using Gordon
model.

A. Re-investment rate

B. Price of share

3. What elements increase and decrease because of stock splits and stock repurchases
respectively?

4. Which dividend policy theory is more sense making than others to you and why?

5. Assume N co. has an expected earnings per share of br. 10, and a retention ratio of 40%. What
is the cost of common stock of this company assuming an expected price of br. 90 and a current
price of br. 85? (Hint: use MM approach)

6. What is the importance of EBIT-EPS analysis?