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Dividend Policy: Exercise Questions

1. Mishra & Co. Earns 6 per share having a capitalisation rate of 10% and has a return on
investment at the rate of 20%. According to Walters model, what should be the price
per share at 30% dividend payout ratio? Is this the optimum payout ratio as per Walter?
2. Given is the following information collected from the annual report of Maza Ltd.:
Net profit
30 lakh
Outstanding 12% preference
No. of equity shares
Return on investment

100 lakh
3 lakh

What should be the approximate dividend pay-out ratio so as to keep the share price at
42 by using Walters model?
3. The books of BenTen Ltd. shows the following details:
Earnings of the company
Dividend pay-out ratio


No. of shares outstanding


Equity capitalization rate


Rate of return on investment


(a) What would be the market value per share as per Walters model?
(b) What is the optimum dividend pay-out ratio according to Walters model and the
market value of BenTen Ltd.s share at that pay-out ratio?
4. Given below arethe details relating to Manza Pvt. Ltd.:
Total earnings
No. of equity shares (of 100
Dividend paid
Price/earnings ratio


(a) Find out whether MPL is following an optimal dividend policy.

(b) Determine the P/E ratio at which the dividend policy will have no effect on the value
of the share.
(c) Will your decision change, if the P/E ratio is revised to 8 (instead of 12.5)?
5. Innovations Pvt. Ltd. provides the following information:
Earnings of the company
Dividend pay-out ratio
No. of outstanding shares


Rate of return on investment


Equity capitalization rate


(a) Find out the market value per share as per Walters model.
(b) Determine the optimum dividend pay-out ratio according to Walters model and the
market value of the share of IPL at that optimal pay-out ratio.
6. M/s Shubhra & Sons reports an earning of 8 per share and has a capitalization rate of
10%. The return on investment is 20%. According to Walters model, what should be the
price per share at 25% dividend payout ratio? Is this the optimum pay-out ratio as per
Walters model?

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7. Suppose that the earnings per share of Rama Krishna Ltd. is 10 and the rate of
capitalization applicable to it is 10%. The company has three options of paying dividend
as following:
75%, and
Calculate the market price of the share as per Walters model if it can earn a return of (a)
15%, (b) 10%, and (c) 5% on its retained earnings.
8. Zimbra Ltd. has an internal rate of return at the rate of 20 per cent. It has declared
dividend at the rate of 18 per cent on its equity shares, having face value of 10 each.
The payout ratio is 36 per cent and Price-Earnings ratio is 7.25. What would be the cost
of equity according to Walters model? Also determine the limiting value of its shares in
case the payout ratio is varied as per the said model.
9. I am considering an investment in 100 equity shares of Mata Motors Ltd. I expect a
return of 10% before tax by way of dividend with an annual growth of 5%. Mata Motors
last dividend was 2 per share. Even as I am willing to invest, suddenly I find that, due to
a budget announcement, dividends have been exempted from tax in the hands of the
recipients. But the imposition of Dividend Distribution Tax on the company is likely to
lead to a fall in dividend of 20 paisa per share. I usually pay 30% of tax.
Determine what should be my estimates of the price per share before and after the
budget announcement?
10. RaGa Music Ltd. has paid a dividend at 2 per share last year. The estimated growth of
the dividends from the company is estimated to be 5% per annum. Determine the
estimated market price of the equity share if the estimated growth rate of dividends:
a. Rises to 8%, and
b. Falls to 3%.
Also find out the present market price of the share, given that the required rate of return
of the equity investors is 15.5%.
11. UBL reports the following information:
Earnings per share
Dividend per share

Cost of capital


Internal rate of return on investment


Retention ratio


Calculate the market price per share using:

(a) Gordons model
(b) Walters model
12. Essex Ltd. has 8 lakh equity shares outstanding at the beginning of the year. The current
market price per share is 120. The Board of Directors of the company is contemplating
6.4 per share as dividend. The rate of capitalization, appropriate to the risk-class to
which the company belongs, is 9.6%.
a. Based on Modigliani and Miller (MM) approach, calculate the market price of the
share of the company, when the dividend is:
i. Declared; and
ii. Not declared.
b. How many new shares are to be issued by the company, if the company desires
to fund an investment budget of 3.2 crore by the end of the year assuming net
income for the year will be 1.6 crore?