DIVIDEND DECISION - PRACTICE QUESTIONS

1. The Earning per share of ABC Ltd. is Rs.10/- and rate of capitalization applicable to it is 10%. The
company has before it the option of adopting a payout of 20% or 40 % or 80%. Using Walter model,
compute the market value of the company’s share if the productivity of retained earning is (i) 20%, (ii)
10% or (iii) 8%.
D/P Ratio 20% 10% 8%
20% Rs.180 Rs.100 Rs.84
40% Rs.160 Rs.100 Rs.88
80% Rs.120 Rs.100 Rs.96

2. Following are the details regarding three companies A Ltd., B Ltd., and C Ltd.

A Ltd. B Ltd. C Ltd

r= 15% r= 5% r= 10%
ke= 10% ke= 10% ke= 10%
E= Rs 8/- E = Rs 8/- E= Rs 8/-
Calculate the value of an equity share of each of these companies applying Walter’s formula when
dividend payout ratio is (a) 25% (b) 50% (c) 75%. What conclusion will u draw?
[B.com (h), 2013]
D/P Ratio A Ltd. B Ltd. C Ltd
25% Rs.110 Rs.50 Rs.80
50% Rs.100 Rs.60 Rs.80
75% Rs.90 Rs.70 Rs.80

3. Following are the details of three companies X ltd. , Y Ltd. and Z Ltd.
X Ltd. Y Ltd. Z Ltd
r = 20% r = 15 % r = 10%
ke = 15 % ke = 15% ke = 15 %
E= Rs 8/- E = Rs 8/- E= Rs 8/-
Calculate the value of equity shares of each of these companies applying Walter’s model when D/P ratio
is (a) 40% (b) 70% (c) 90%.
Ans:
D/P Ratio X Ltd. Y Ltd. Z Ltd
40% Rs.64 Rs.53.33 Rs.42.67
70% Rs.58.67 Rs.53.33 Rs.48.00
90% Rs.55.11 Rs.53.33 Rs.51.55

4. Determine the market value of the shares of the company from the following information:
Earning of the company Rs 5, 00,000
Dividend paid Rs 3, 00,000
Number of shares outstanding Rs 1, 00,000
Price-earnings ratio 8
Return on investment 15%
Are you satisfied with the current dividend policy of the firm? If not, what should be the optimal dividend
payout ratio? Use Walter model?
[Ans: D=0, P = Rs.48][B.com (h), 2011]

DIVIDEND DECISION (PRACTICE QUESTIONS ) BY: CS RITIKA GUPTA 1

 5. From the following information supplied to you, ascertain whether the firm is following an optimal
dividend policy as per Walter’s model.
Total earnings Rs.2,00,000
Number of equity shares (of Rs 100 each) 20,000
Dividend paid 1,50,000
P/E Ratio 12.5
The firm is expected to maintain its rate of return on fresh investment. Also find out what should be the
P/E ratio at which the dividend policy will have no effect on the value of the shares.
[Ans: i) D= 7.50, P= Rs.132.81 ii) D= 0, P = Rs.156.25] [B.Com (H), DU, 2017]

6. ABC ltd. was started a year ago with a paid – up capital of Rs.40, 00,000. The other details are as under:
Earnings of the company Rs, 4,00,000
Dividend paid Rs. 3,20,000
P/E Ratio 12.5
Number of shares 40,000
i) Find the company’s dividend payout ratio. Find the market price of a share of the company at
this payout ratio using Walter’s Model.
ii) Is the company dividend payout ratio optimal as per the Walter’s Model? Why?
iii) What is the market price of a share of the company at the optimal dividend payout ratio as per
the Walter’s model?
[Ans: (i) Rs.131.25, (ii) optimum payout is zero (iii) Rs.156.25] [B.Com (h), 2010]

7. A Company has total investment of Rs.5, 00,000 assets and 50,000 outstanding equity shares of Rs.10
each. If earns a rate of 15% on its investment and has a policy of retaining 50% of the earnings. If the
appropriate discount rate for the firm is 10% determine the price of the shares using Gordon Model. What
shall happen to the price, if the company has payout of 80% or 20%?
[Ans: At 50% = Rs 30; at 80% = Rs 17.41; at 20% = Rs.15]

8. Assuming the rate of return expected by investor is 11%; internal rate of return is 12%; and earning per
share is Rs.15, calculate price per share by Gordon Approach method if dividend payout is 10% and 30%.
[Ans: at 10%= Rs750/-; at 30% = Rs.173.08]

9. ABC ltd. has a capital of Rs. 10, 00,000 in equity shares of Rs.100/- each. The shares are currently quoted
at par. The company proposes to declare a dividend of Rs.10/- share at the end of current financial year.
The capitalization rate for the risk class to which the company belongs is 12%. What will be the market
price of the share at the end of the year, if
i) A dividend is not declared?
ii) A dividend is declared?
iii) Assuming that the company pays the dividend and has net profits if Rs.5, 00,000 and make new
investment of Rs. 10, 00,000 during the period, how many new shares must be issued? Using the
MM model.
[Ans: (i) Rs112 (ii) Rs.102 (iii) 5883 shares @ 102 per share]

10. Best buy Auto Ltd has outstanding 1, 20,000 shares selling at Rs. 20 per share. The company hopes to
make a net income of Rs.3, 50,000 during the year ended 31st March 2014. The company is considering
to pay a dividend of Rs.2/- per share at the end of current year. The capitalization rate for risk class of

DIVIDEND DECISION (PRACTICE QUESTIONS ) BY: CS RITIKA GUPTA 2

 this company has been estimated to be 15%. Assuming no taxes, answer the questions listed below on
basis of M-M Approach.
i) What will be the price of a share at the end of 31st March, 2014, if (a) the dividend is paid; and
(b) dividend is not paid.
ii) How many new shares must the company issue of the dividend is paid and company needs Rs.
7,40,000 for an approved investment expenditure during the year?
[Ans: i) (a) Rs21 (b) Rs 23; new shares: 30000 shares] [B.com (h), 2014]

11. Diamond Engineering company has 10,00,000 equity shares outstanding at the start of the accounting
year. The ruling market price per share is Rs.150/-. The Board of directors of the company contemplates
declaring Rs 8 share as dividend at the end of current year. The rate of Capitalization appropriates to the
risk – class to which the company belongs is 12%
a) Based on M-M Approach, calculate market price per share of the company when the contemplated
dividend is (i) declared and (ii) not declared.
b) How many new shares are to be issued by the company at the end of accounting year on the
assumption that the Net Income for the year is Rs.2 crore? Investment budget is Rs.4 crore and (i)
the above dividends are distributed and (ii) they are not distributed?
c) Show that the total market value of the shares at the end of the accounting year will remain the
same whether dividend are either distributed or not distributed. Also find out the current market
value of the firm under both situations.
[Ans: (a) (i) Rs160 (ii) Rs168 (b) 1,75,000 & 1,19050 (c) current mkt price remain same]
[B.com(h) 2006,2009]

12. A company belongs to a risk class for which the appropriate capitalization rate is 10%. It currently has
outstanding 25,000 shares selling at Rs.100 each. The firm is contemplating the declaration of dividend
of Rs.5/ share at the end of the current Financial Year. The company expects to have a net income of
Rs.2.5 lacs and a proposal for making new investment of Rs 5 lacs.
Show that under the M M assumption, the payment of dividend does not affect the value of the firm.
[Ans: P1= Rs 105 & Rs 110; new shares: 3572 & 2273][B.com (h), 2011]

13. PQR ltd. had 50,000 equity shares of Rs.10 each outstanding on January 1. The shares are currently being
quoted at par in the market. The company now intends to pay a dividend of Rs. 2/share for the current
calendar year. It belongs to risk – class whose appropriate capitalization rate is 15%. Using M –M
Approach and assuming no taxes, ascertain the price of the company share as it is likely to prevail at the
end of the year (i) when dividend is declared (ii) when dividend is not declared.
Also find out the number of new equity shares that the company must issue to meet its investment needs
of Rs. 2 lacs, assuming a net income of Rs. 1.1 lacs and also assuming that the dividend is paid. Also show
that the total market value of the shares at the end of the accounting year will remain the same whether
dividend are either distributed or not distributed.
[Ans: P1= Rs 9.5 & Rs.11.5; Market value of shares: Rs6, 65000 & Rs.6, 65,000][B.com (h), 2015]

14. A firm has paid a dividend of Rs.2/ share last year. The growth of the dividend for the company is
estimated to be 5% p.a. Determine the estimated market price of the equity shares if the estimated growth
rate of dividend: (i) Rise to 8% and (ii) fall to 3%.
Also find out the present market price of the shares, given that the required rate of equity investors is
15.5%.
[Ans: existing price = Rs 20, price at 8%= Rs.28.80, at 3% = Rs16.48] [B.com (h), 2014]

DIVIDEND DECISION (PRACTICE QUESTIONS ) BY: CS RITIKA GUPTA 3

 15. 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 started. Given the assumption of MM, answer the
following Questions.
i) What will be the price of the shares at the end of the year
a) If dividend is not declared
b) If dividend is declared
ii) Assuming that the firm pays dividend, has a net income of Rs.5,00,000 and makes a new investment
of Rs.10,00,000 during the period, how many new shares must be issued.
iii) What will be the value of the firm a) if dividend is declared b) if dividend is not declared?

[Ans:i) (a)Rs.110 (b) Rs.102 ii. New Shares: 8824 & 4546 iii.VOF = Rs.60,00,000] [B.com (h), 2016]

16. The following Information is supplied to you, about LK Ltd.:

Earnings of the company Rs. 15, 00,000
Dividends paid Rs.5,00,000
Number of issued shares 1,00,000
Price earnings ratio 10
Rate of return on investment (%) 15

i) Determine the theoretical market price of the shares as per walter’s model.
ii) Are you satisfied with the current dividend policy of the firm? If not, what should be optimal dividend
payout ratio in this case? Find out the price of the shares at that dividend payout ratio.
Ans :Price = Rs. 200 & Rs. 225 [B.com (h), 2016]

DIVIDEND DECISION (PRACTICE QUESTIONS ) BY: CS RITIKA GUPTA 4