Determine the market value of equity shares of the company from the following information : Earnings of…
Earnings per share are ₹ 5,00,000 / 1,00,000 = ₹ 5, current dividend per share is ₹ 3,00,000 / 1,00,000 = ₹ 3 (a 60% pay-out), and the cost of equity is the reciprocal of…
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Determine the market value of equity shares of the company from the following information :
Earnings of the Company — ₹ 5,00,000
Dividend Paid — ₹ 3,00,000
Number of Shares Outstanding — 1,00,000
Price-earnings Ratio — 8 times
Rate of return on investment — 15%
Are you satisfied with the current dividend policy of the firm ? If not, what should be the optimal dividend pay-out ratio ? Use Walter's model.
Answer and explanation
Correct answer B
Earnings per share are ₹ 5,00,000 / 1,00,000 = ₹ 5, current dividend per share is ₹ 3,00,000 / 1,00,000 = ₹ 3 (a 60% pay-out), and the cost of equity is the reciprocal of the price-earnings ratio, 1 / 8 = 12.5%. Because the internal rate of return (15%) exceeds the cost of equity (12.5%), the firm is a growth firm under Walter's model and the current dividend policy (which gives a share price of ₹ 43.20) is not satisfactory. The optimal dividend pay-out ratio is 0%, at which the market price per equity share is P = [0 + (0.15 / 0.125) × (5 − 0)] / 0.125 = ₹ 48.
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Himachal Pradesh SET (HP SET)