Financial Management UNIT- III

5. Dividend Decisions
(Practical Problems)
1. The following information regarding shares of Sakshi Ltd. Is given. You are requested to find out
market price as per traditional position theory. Earnings per share ₹ 30, Dividend Payout Ratio 70%,
Multiplier 6.

2. The following information regarding shares of Moon Ltd. Is given.

Market Price: ₹ 58.33
Dividend per share ₹ 5
Multiplier: 7
Compute EPS for Moon Ltd. According to Graham & Dodd traditional position theory.

3. G Ltd. Is relatively a new company. The earnings per share of the company is ₹ 30 and dividend payout
of 60%. If the share price of the company is ₹ 56 whereas cost of capital and internal rate of return on
investment is 15% and 18% respectively. What is the multiplier applicable to the company according
to traditional position (Graham & Dodd Model)?

4. Sharma Ltd. earns ₹ 10 per share which is capitalised at 10% p.a. and has a return on investment of
12% p.a. Determine optimum payout ratio and price of the share of the payout using Walter’s dividend
policy Model.

5. The earning per share of a company are ₹ 8 and the rate of capitalization applicable to the company is
10% p.a. The company has before it an option of adopting a payout ratio of 25% or 50% or 75%. Using
Walter’s formula of dividend payout compute the market value of the company’s share if the
productivity of retained earnings is (i) 15% p.a. (ii) 10% p.a. and (iii) 5% p.a.

6. Balaji & Co. has been following a dividend policy which can maximize the market value of the firm
as per Walter’s Model. In the current year the firm expects earnings of ₹ 5,00,000. It is estimated that
firm can earn ₹ 1,00,000, if the profits are retained fully. The investor have alternative investment
opportunity that can yield 10% return. The firm has 50,000 shares outstanding. What should be the
dividend payout ratio in order to maximize the Wealth of Shareholders? Also find out the current
market price of the share.

7. The following figures are collected from the annual report of Chandu Ltd.

Particulars ₹/ %
Net Profit 30 lakhs
12% Preference shares 100 lakhs
No. of equity shares 3 lakhs
Return on investment 20%
Cost of Capital 16%
What should be the approximate dividend payout ratio so as to keep the share price ₹ 45 by using
Walter’s Model.

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Financial Management UNIT- III

8. The following information pertains to M/s AG Ltd.

Particulars ₹/ %
Earnings 5,00,000
Dividend Payout Ratio 60%
No. of shares outstanding 1,00,000
Equity Capitalization rate 12%
Rate of Return on Investment 15%
(i) What should be the market value per share as per Walter’s Model?
(ii) What is the optimum dividend payout ratio as per Walter’s Model and the market value per
share at optimum payout ratio?

9. Sanju Ltd. provides you with following information for you to value share based on Gordon’s Model.
It distributes 20% dividend with a growth rate of 2%. It has a paid up capital of 10 lakhs equity shares
of ₹ 10 each. The expected rate of return on equity capital is expected at 15%.

10. A company has invested ₹ 500 lakhs in assets. There are 50 lakh shares outstanding. The par value of
each share is ₹ 10. It is expected to earn a rate of 15% and has a policy of retaining 40%. The expected
rate of growth is 5%. What is the price of its share using Gordon’s Model. What will happen to the
price of share if the company has a payout of 80% and 20%?

11. Mr. Jack is contemplating purchase of 1000 equity shares of a company. His expected rate of return is
10% before tax by way of dividend with annual growth of 5%. The company’s last dividend was ₹ 2
per share. Even as he is contemplating Mr. Jack suddenly finds due to announcement by Finance
Minister dividends are exempted from tax in the hands of shareholders but dividend distribution tax on
the company was imposed which leads to fall in dividend of 20 per share. Marginal rate of tax in hands
of Mr. Jack was 30%. Calculate what should be Mr. Jack’s estimated share price before and after
announcement by Financial Minister.

12. A firm has paid dividend of ₹ 5 per share last year. The estimated growth of dividend from the company
is estimate to be 7.5% p.a. determine the estimated market price of the equity share if the growth rate
of dividend; (i) rises by 3% and (ii) falls by 2%. Also find out present market price per share given that
the required rate of return of equity investor is 15.5%.

13. The following information is given for AB Ltd.

Particulars ₹/%
Earnings Per Share ₹12
Dividend Per share ₹3
Cost of Capital 18%
Internal Rate of Return 22%
Growth in Dividend 12%

Calculate the market price per share using:

(i) Walter’s Model
(ii) Gordon’s Model

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Financial Management UNIT- III

14. With the help of the following figures calculate the market price of a share of a company using;
(i) Walter’s Model
(ii) Gordon’s Model
Particulars ₹/%
Earnings Per Share ₹10
Dividend Per share ₹6
Cost of Capital 20%
Internal Rate of Return 25%
Growth 15%

15. ABC Ltd. has a capital of ₹ 10,00,000 in equity shares of ₹ 10 each. The shares are currently quoted
at par. The company proposes declaration of a dividend of ₹ 10 per share at the end of the financial
year. The capitalization rate for the same class of the company is 12%.
What will be market price of the shares at the end of year if:
(i) Dividend is not declared?
(ii) Dividend is declared?
Assuming that the company pays the dividend and has net profits of ₹ 5,00,000 and makes new
investment of ₹ 10,00,000 during the period, how many new shares must be issued. Use M. M. Model.

16. P. L. Ltd. belongs to risk class for which the capitalization rate is 10%. It currently has outstanding
10,000 shares selling at ₹ 100 each. The firm is thinking on declaration of dividend of ₹ 5 per share at
the end of current financial year. It expects to have a net income of ₹ 1,00,000 and has a proposal for
making new investments of ₹ 2,00,000. Show how under M. M. Model, the payment of dividend does
not affect the value of the firm?

17. D Ltd. has 10,00,000 equity shares outstanding at the start of 2015. The current market price is ₹ 150
per share. The BOD are of the view to declare a dividend of ₹ 8 per share at the end of current year.
The capitalization rate for same class of company is 12%.
(a) Based on M. M. approach, calculate market price per share if dividend is declared or not declared.
(b) How many new shares are to be issued by the company at the end of 2015 on the assumption that net
income for year is ₹ 2 crores, investment budget is ₹ 4 crores and dividend is declared or not declared.
(c) Show that the total market value of the shares at the end of year will remain same whether dividends
are declared or not. Also find out the current market value of firm under both the situations.