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Numerical Problem of Dividend

The document contains 7 numerical exercises involving the application of Walter's model and Gordon's growth model to calculate the market price of shares for various companies. The exercises provide earnings per share, dividend payout ratios, capitalization rates, retention ratios and expected returns on retained earnings to calculate the theoretical market price per share based on the constant growth dividend discount models.

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Shreya Dikshit
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166 views8 pages

Numerical Problem of Dividend

The document contains 7 numerical exercises involving the application of Walter's model and Gordon's growth model to calculate the market price of shares for various companies. The exercises provide earnings per share, dividend payout ratios, capitalization rates, retention ratios and expected returns on retained earnings to calculate the theoretical market price per share based on the constant growth dividend discount models.

Uploaded by

Shreya Dikshit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Numerical Problem of Dividend

Exercise 1

The earnings per share of B Ltd. is ` 4 and the


rate of capitalisation applicable is 10%. The
company has before it an option of adopting:
(i) 50% (ii) 75% and (iii) 100% dividend payout
ratio. Compute the market price of company’s
shares as per Walter’s model if it can earn a
return of 10% on its retained earnings.
Exercise 2

Following are the details regarding three companies


X Ltd., Y Ltd. and Z Ltd.
X Ltd. Y Ltd. Z Ltd.
r = 15% r = 15% r = 10%
Ke = 10% Ke = 10% Ke = 10%
E=`8 E=`8 E = `.8
Calculate the value of equity share of each of the
company applying Walter’s model, when dividend
payout ratio is: (a) 50%, (b) 75% and (c) 25%. You are
required to offer your comments on the result.
Exercise 3

X Ltd. has an investment of ` 5,00,000 in


assets and 50,000 shares outstanding at ` 10
each. It earns a rate of 15% on its investment
and has a policy of retaining 50% of the
earnings. If the appropriate discount rate is
10%, determine the price of company’s share
using Gordon’s Growth Model.
What will be the share price if the company
has a payout of 80% or 40%?
Exercise 4

• A company has an EPS of Rs. 15. The market


rate of discount applicable to the company is
12.5%. Retained earnings can be reinvested at
IRR of 10%. The company is paying out Rs.5 as
a dividend. Calculate the market price of the
share using Walter’s model.
Exercise 5

X Company Ltd., has 100000 shares outstanding


the current market price of the shares Rs. 15 each.
The company expects the net profit of Rs.
2,00,000 during the year and it belongs to a rich
class for which the appropriate capitalisation rate
has been estimated to be 20%. The company is
considering dividend of Rs. 2.50 per share for the
current year. 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.
Exercise 6

The earnings per share of a company are Rs.


80 and the rate of capitalization applicable to
the company is 12%. The company has before
it an option of adopting a payment ratio of
25% (or) 50%(or) 75%. Using Walter’s formula
of dividend payout, compute the market
value of the company’s share of the
productivity of retained earnings i.e. r are (i)
12% (ii) 8% (iii) 5%.
Exercise 7

From the following data, calculate the MP of


a share of ABC Ltd., under (i) Walter’s formula;

EPS = Rs. 10 DPS = Rs. 6


Ke = 18% r = 25%
retention ratio (b) = 45%

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