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Problem Review Set Dividend Policy With Solutions

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Dividend Decisions
1. RST Ltd has a capital of Rs 10,00,000 in equity shares of Rs 100 each. The shares
are currently quoted at par. The company proposes to declare a dividend of Rs 10 per
share at the end of the current financial year. The capitalization rate for the risk class of
which the company belongs is 12%. What will be the market price of the share at the end
of the year, if
(a) a dividend is not cleared?
(b) a dividend is declared?
(c) assuming that the company pays the dividend and has net profits of Rs 5,00,000
and makes new investments of Rs 10,00,000 during the period, how many new
shares must be issued? Use the MM model.
[CA Final, Nov. 2008]
Ans: (a) Rs 112; (b) Rs 102; (c) 5883 shares
2. A company has a book value per share of Rs 137.80. Its return on equity is 15% and
it follows a policy of retaining 60% of its earnings. If the Opportunity Cost of Capital is
18%, what is the price of the share today?
[CA Final, May 2002]
Ans: Rs 103.35
3. Sahu & Co. earns Rs 6 per share having capitalization rate of 10 per cent and has a
return on investment at the rate of 20 per cent. According to Walter’s model, what should
be the price per share at 30 per cent dividend payout ratio? Is this the optimum payout
ratio as per Walter?
[CA Final, Nov. 2002]
Ans: Price per share Rs 102;
Payout ratio is not optimum.
4. X Ltd has 8 lakh equity shares outstanding at the beginning of the year 2003. The
current market price per share is Rs 120. The Board of Directors of the company is
contemplating Rs 6.4 per share as dividend. The rate of capitalization, appropriate to the
risk-class to which the company belongs, is 9.6%.
(i) Based on MM Approach, calculate the market price of the share of the company,
when the dividend is(a) declared; and (b) not declared.
(ii) How many new shares are to be issued by the company, if the company desires to
fund an investment budget of Rs 3.20 crores by the end of the year assuming net
income for the year will be Rs 1.60 crores?
[CA Final, May 2003]
Ans: Dividend declared Dividend not declared
(i) 125.12 131.52
(ii)1,68,798 1,21,655.
5. The following figures are collected from the annual report of XYZ Ltd:
Rs lakh
Net Profit 30
Outstanding 12% preference shares 100
No. of equity shares 3
Return on Investment 20%
What should be the approximate dividend payout ratio so as to keep the share price at
Rs 42 by using Walter model?

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Dividend Decisions  1. RST Ltd has a capital of Rs 10,00,000 in equity shares of Rs 100 each. The shares are currently quoted at par. The company proposes to declare a dividend of Rs 10 per share at the end of the current financial year. The capitalization rate for the risk class of which the company belongs is 12%. What will be the market price of the share at the end of the year, if (a) a dividend is not cleared? (b) a dividend is declared? (c) assuming that the company pays the dividend and has net profits of Rs 5,00,000 and makes new investments of Rs 10,00,000 during the period, h ...
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