Q.1. Following are the details regarding three companies A Ltd., B Ltd. and C Ltd.:
Calculate the value of an equity share of each of these companies applying Walter’s formula when dividend payment ratio (D./P ratio) is : (a) 25%, (b) 50%, (c) 75%. What conclusions do you draw ?
Q.2. The earnings per share of a share of the face value of Rs. 100 of PQR Ltd. is Rs. 20. It has rate of return of 25%. Capitalization rate of its risk is 12.5%. If Walter’s model is used :
(a) What should be the optimum payout ratio?
(b) What should be the market price per share if the payout ratio is zero?
(c) Suppose, the company has a payout of 255 of EPS, what would be the price per share?
Q.3. The earnings per share of ABC Ltd. is Rs. 10 and rate of capitalization applicable to it is 10%. The company has before it the options of adopting a pay-out of 20% or 40% or 80%. Using Walter’s formula, compute the market value of the company’s share if the productivity of retained earnings is (i) 20%, (ii) 10% or (iii) 8%.
Q.4. Determine the market value of equity shares of the company from the following information:
|Earnings of the company||5,00,000|
|Number of shares outstanding||1,00,000|
|Rate of return on investment||5%|
Are you satisfied with the current dividend policy of the firm? If not, what should be the optimal dividend payout ratio? Use Walter’s Model.
Q.5. The earnings per share (EPS) of a company is Rs. 10. It has an internal rate of return of 1 5% and the capitalisation rate of its risk class is 12.5%. If Walter’s Model is used –
(i) What should be the optimum payout ratio of the company ?
(ii) What should 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 ?
Q.6. ABC and Co. has been following a dividend policy which can maximize the market value of the firm as per Walter model. Accordingly. each year, at dividend time the capital budget is reviewed on conjunction with the earnings for the periods and alternative investment opportunities for the shareholders.
In the current year, the firm expects earnings of Rs. 5,00,000. It is estimated that the firm can earn Rs. 1,00,000 if the profits are retained. The investors have alternative investment opportunities that will yield them 10& return. The firm has 50,000 shares outstanding.
what should be the dividend payout ratio in order to maximize the wealth of the shareholders ? Also find out the current market price of the share.
Q.7. Diamond Engineering Company has 10,00,000 equity shares outstanding at the start of the accounting year 1997. The ruling market price per share is Rs. 150. The Board of Directores of the Company contemplates declaring Rs. 8 share as dividend at the end of the current year. The rate of Capitalization appropriate to the risk-class to which the company belongs is 12%.
(a) Based on Modigliani=Miller Approach, calculate the 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 the accounting year on the assumption that the Net Income for the year is Rs. 2 crores ? Investment budget is Rs. 4 crores 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 dividends are either distributed or not distributed. Also find out the current market value of the firm under both situations.
Q.8. 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 per 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 investments of Rs. 5 lacs. Show that under the MM assumptions, the payment of dividend does not affect the value of the firm.
Q.9. The earnings per share of a company are Rs.10. It has rate if return f 15% and the capitalization rate of 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 his this payout ? (iii) How shall the price of the share be affected if a different payout was employed?
Ans. As r > ke’ the optimal payout ratio is zero. The price of the share would be Rs. 96.
Q.10. The earnings per share of a Company are Rs. 8 and the rate of capitalization applicable to the company is 10%. 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%, (ii) 10%, and (ii) 5%.
Ans. The price at r = 10% would be Rs. 80 in all cases of payout. At r = 15%, the price would be Rs. 110, Rs. 100 and Rs. 90 respectively. At r = 5%, the price would be Rs. 50, Rs. 60 and Rs. 70 respectively.