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Dividend Example

The document contains a series of financial questions related to the valuation of shares using Walter's and Gordon's models, focusing on earnings per share, payout ratios, internal rates of return, and capitalization rates. Each question requires calculations to determine optimum payout ratios, share prices at various payout levels, and the impact of different payout strategies on share prices. The scenarios involve different companies and their financial metrics, prompting analysis of how dividend policies affect market prices.

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Aastha Shukla
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3 views2 pages

Dividend Example

The document contains a series of financial questions related to the valuation of shares using Walter's and Gordon's models, focusing on earnings per share, payout ratios, internal rates of return, and capitalization rates. Each question requires calculations to determine optimum payout ratios, share prices at various payout levels, and the impact of different payout strategies on share prices. The scenarios involve different companies and their financial metrics, prompting analysis of how dividend policies affect market prices.

Uploaded by

Aastha Shukla
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

Q.1 The earning per share of a company are Rs. 10.

It has an internal rate


of return of 15% and the capitalization rate of its risk class is 12.5%. If
Walter’s model is used: (i) What should be the optimum payout ratio of
the firm? (ii) What would be the price of the share at this payout? (iii)
How shall the price of the share be affected if a different payout were
employed? (you may assume 20%).

Q.2 The following information is available for Avanti Corporation.


Earnings per share : ₹ 4.00
Rate of return on investments : 18 percent
Rate of return required by shareholders: 15 percent
What will be the price per share as per the Walter model if the payout
ratio is 40 percent? 50 percent? 60 percent?

Q.3 A company has a total investment of Rs. 5,00,000 in assets and 50,000
outstanding ordinary shares at Rs. 10 per share (par value). It earns a rate
of 15% on its investments and has a policy of retaining 50% of the
earnings. If the appropriate discount rate of the firm is 10%, determine the
price of the share using Gordon’s model. What shall happen to the price
of the share if the company has a payout of 80% or 20%?

Q.4 The following information is available for Kavita Musicals.


Earnings per share : ₹ 5.00
Rate of return required by shareholders: 16 percent
Assuming that the Gordon valuation model holds, what rate of return
should be earned on investments to ensure that the market price is ₹ 50
when the dividend payout is 40 percent?
Q.5 Given the following information about ZED Ltd, show the effect of
the dividend policy on the market price of its shares, using the Walter’s
model at (1) 0 percent payout (2) 50 % payout (3) 75 % payout and (4)
100 % Payout:
Equity capitalization rate (ke) = 12%
Earnings per share (E) = Rs. 8
Assumed return on investments (r) are as follows:
i. r = 15%
ii. r = 10%
iii. r = 12%

Q.6 Walter and Gordon Model

The following data is available for Parkson Company:


Earnings per share = ₹ 3.00
Internal rate of return = 15 percent
Cost of capital = 12 percent
If Walter’s valuation formula holds, what will be the price per share when
the dividend payout ratio is 50 percent? 75 percent? 100 percent?

If Gordon’s basic valuation formula holds, what will be the price per share
when the dividend payout is 25 percent, 50 percent, and 75 percent?

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