QUESTION

EPS 10
DPS 0 1 2 3 4 5 6 7 8 9 10
r 0.15
ke 0.1

Calculate the price of the share as per the Walter Model under different assumptions of DPS.
What is the optimum dividend policy in case of the above example?
SOLUTION
Share Price as Per Walter Model = [ D + r/ke (E-D) ] / ke

EPS 10 10 10 10 10 10 10 10 10
DPS 0 1 2 3 4 5 6 7 8
r 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
ke 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Share Price = [ D + r / ke (E - D) ] / ke 150 145 140 135 130 125 120 115 110

Optimum Dividend Policy In this example the optimum dividend policy is the ZERO dividend, as the company is growth company and company sho
 10 10
9 10
0.15 0.15
0.1 0.1

105 100

ompany and company should not pay any dividend.

QUESTION
EPS 50
DPS 0 5 10 15 20 25 30 35 40 45 50
r 0.16
ke 0.12

Calculate the price of the share as per the Walter Model under different assumptions of DPS.
What is the optimum dividend policy in case of the above example?
SOLUTION
Share Price as Per Walter Model = [ D + r/ke (E-D) ] / ke

EPS 50 50 50 50 50 50 50 50 50
DPS 0 5 10 15 20 25 30 35 40
r 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.16
ke 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12

Share Price = [ D + r / ke (E - D) ] / ke 555.556 541.6667 527.7778 513.8889 500 486.1111 472.2222 458.3333 444.4444

Optimum Dividend Policy In this example the optimum dividend policy is the ZERO dividend, as the company is growth company and company sho
 50 50
45 50
0.16 0.16
0.12 0.12

430.5556 416.6667

ompany and company should not pay any dividend.

QUESTION
A company belongs to a risk class for which the approximate capitalization rate is 10%.
It currently has outstanding 25,000 shares selling at ₹100 each.
The firm is contemplating the declaration of a dividend of ₹5 per share at the end of the current financial year.
It expects to have a net income of ₹2,50,000 and has a proposal for making new investments of ₹5,00,000.
Show that under the MM assumptions, the payment or non-payment of dividend does not affect the value of the firm.

SOLUTION

Number of Shares 25000

Price of the Share (P0) 100
Ke 0.1
DPS ₹ 5 or ₹0
Investment Outlay ₹ 500,000
Earnings ₹ 250,000

DIVIDEND IS PAID DIVIDEND IS NOT PAID

VALUE OF FIRM = n * P0 = 2500000 VALUE OF FIRM =

P0 = 1/(1+ke)*(P1+D1) P0 =
P1 = (P0 * (1+ke)) - D1 P1 =
₹ 105

Dn*P1 = I - (E - nD1) Dn*P1 =

₹ 375,000

Dn = I - [ E - nD1 ] / P1 Dn =
3571.428571

nP0 = 1 / ( 1 + ke ) * [ ( n + Dn ) * P1 - I + E ] nP0 =
₹ 2,500,000.00
 Dn*P1

n * P0 = 2500000

1/(1+ke)*(P1+D1)
(P0 * (1+ke)) - D1
₹ 110

I - (E - nD1)
₹ 250,000

[ I - nD1 ] / P1
2272.727273

1 / ( 1 + ke ) * [ ( n + Dn ) * P1 - I + E ]
₹ 2,500,000.00
QUESTION
A company belongs to a risk class for which the approximate capitalization rate is 10%.
It currently has outstanding 50,000 shares selling at ₹100 each.
The firm is contemplating the declaration of a dividend of ₹10 per share at the end of the current financial year.
It expects to have a net income of ₹5,00,000 and has a proposal for making new investments of ₹15,00,000.
Show that under the MM assumptions, the payment or non-payment of dividend does not affect the value of the firm.

SOLUTION

Number of Shares 50000

Price of the Share (P0) 100
Ke 0.1
DPS ₹ 10 or ₹0
Investment Outlay ₹ 1,500,000
Earnings ₹ 500,000

DIVIDEND IS PAID DIVIDEND IS NOT PAID

VALUE OF FIRM = n * P0 = 5000000 VALUE OF FIRM =

P0 = 1/(1+ke)*(P1+D1) P0 =
P1 = (P0 * (1+ke)) - D1 P1 =
₹ 100

Dn*P1 = I - (E - nD1) Dn*P1 =

₹ 1,500,000

Dn = I - [ E - nD1 ] / P1 Dn =
15000

nP0 = 1 / ( 1 + ke ) * [ ( n + Dn ) * P1 - I + E ] nP0 =
₹ 5,000,000.00
n * P0 = 5000000

1/(1+ke)*(P1+D1)
(P0 * (1+ke)) - D1
₹ 110

I - (E - nD1)
₹ 1,000,000

[ I - nD1 ] / P1 (formula wrong? so answer not matching)

13636.36364

1 / ( 1 + ke ) * [ ( n + Dn ) * P1 - I + E ]
₹ 5,454,545.46