Dividend Decisions

CA Final Course Paper 2 Strategic Financial Management

Chapter:4
Prof.C.P.Gupta
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Material, Practice Manual and other content
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Ills 1 : Problem Statement
A firm has recently paid a dividend of Rs. 2 per share. The earning per share (EPS) for
the year 2013-14 is Rs. 10 and the cost of equity is estimated to be 20%. Assume that
Walters Model of Dividend is applicable to the firm. The market price as on March 31,
2014 is Rs. 60 per share.

Find out the market price of the share if the EPS is Rs. 12 and the payout ratio is 40%.
as per the Walters Model: .
Ills 2 : Problem Statement
The following information has been extracted from the Annual Report 2013 of
Sunrise Limited:

(Rs. in lakhs)
Share Capital (Face Value of Share - Rs. 10) Rs. 5,000
Net Worth Rs. 22,500
Profit After Tax (PAT) Rs. 2,500
Dividend Rate 25%

You are required to calculate the share price of Sunrise Limited under
(i) Walters Dividend Model and
(ii) Gordons Dividend Model.
Ills 3: Problem Statement
A Company belongs to a risk class for which the appropriate capitalization rate is
14.40%.

It has currently outstanding 50,000 shares with a market price of Rs. 75 each.

The company is contemplating the declaration of a dividend of Rs. 5.80 per share at the
end of the current financial year. It expects to have a Net Income of Rs. 5 lakhs and has
a proposal for making new investments of Rs. 10 lakhs.

Show that under MM assumptions, the payment of dividend does not affect the value of a
firm.
 Ills 4: Problem Statement
Mr. S. S. Gupta is CFO in Great Industry Limited. He has to decide and to recommend to the
Board of Directors a suitable dividend rate for FY 2013-14 that would maximize market prices
of the companys share. For this purpose, the following information has been extracted from
the companys financial statements.

(Rs. in lakhs)

Share Capital (Face Value of Share - Rs. 10) Rs. 6,000

Net Worth Rs. 12,500

Profit After Tax (PAT) Rs. 2,500

Present Dividend Pay-out Ratio 40%

Cost of Equity 18%

Price/Earning (P/E) Ratio 12

Ills 4: Problem Statement Cont..
For taking a suitable dividend decision, Mr. Gupta is
considering a number of options/alternative. You are required
to help him in this regard by answer the following questions
using Walters Model Dividend:
Determine the price of the companys share if present Dividend-Payout
Ratio is maintained?
What should be the Dividend-Payout Ratio if existing P/E Ratio is to be
maintained?
What should be the Dividend-Payout Ratio if P/E is 15 instead of 12?
What should be the optimum Dividend-Payout Ratio so as to maximize
market price of the share?
Thank You