Dividend Decision Practical Assignment

1. Following are the detail 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 Walters
formula when dividend payout ratio( D/P ratio) is a) 50% ,b) 75%, c) 25%
2. The earnings per share of ABC Ltd is Rs 10 and the rate of capitalization applicable
to it is 10%. The company has before it the option of adopting a pay out of 20% or
40% or 80%. Using Walters formula, compute the market value of the company’s
share if the productivity of retained earnings is (i) 20%, (ii) 10% or (iii) 8%
3. Assuming that rate of return expected by investor is 11%; internal rate of return is
12% and earnings per share is Rs 15. Calculate price per share by Gordon Approach
method if dividend payout ratio is 10% and 30%.
4. Calculate price of the shares by Gordon model when D/P ratio is (a) 10% , (b) 20%,
earning per share is Rs 20. The expected rate of return is 12 % and cost of equity is
20%.
5. MM Foam Company currently has 50,000 outstanding shares selling at Rs. 100 each.
The firm expected to have a net earning of Rs. 4,00,000 and contemplating dividend
of Rs. 5 per share at the end of the current financial year. There is a proposal for
making new investment of Rs. 12,00,000. Assuming 10% cost of capital show that
under MM hypothesis, the payment of dividend does not affect the value of the firm.

6. Textrol Ltd has 80,000 shares outstanding. The current market price of these shares is
Rs 15 each. The company expect a net profit of Rs 2,40,000 during the year and it
belongs to a risk class for which appropriate capitalization rate has been estimated to
be 20%. The company is considering dividend of Rs 2 per share for the current year.
a) What will be the price of the share at the end of the year (i) if the dividend is
paid and (ii) if the dividend is not paid?
b) How many new shares must the Co. issue if the dividend is paid and the Co.
needs Rs. 5,60,000 for an approved investment expenditure during the year?
Use MM Model for calculation.

Dr. Ramanpreet Singh Page 1