Question

ONIONO POLKY
The earnings per share of Itd. is 4 and the rate of capitalisation applicable is 10%. The
company has before it an option of adopting: (i) 50% (ii) 75% and (iii) 100%
dividend payout ratio. Compute the market price of company's shares as per Walter's model if
it can earn a return of 10% on its retained earnings.​

Answer 1

Answer:

Answer will be 40 in all the cases since Capitalisation rate(Ke) and rate of return on retained (r) earnings is same.

Explanation:

In Case (i) EPS (Earnings per share)= 4, Dividend payout ratio is 50%

hence DPS(Dividend Per Share)= 2

As per Walter's Model,

P(Price)= $\frac{DPS}{Ke}$+$\frac{(r/Ke) (EPS-DPS)}{Ke}$

hence P=$\frac{2}{0.10}$+$\frac{(0.10/0.10)*(4-2)}{0.10}$=20+20=40

Case (ii) EPS (Earnings per share)= 4, Dividend payout ratio is 75%

hence DPS(Dividend Per Share)= 3

hence P= $\frac{3}{0.10}$+$\frac{(0.10/0.10)*(4-3)}{0.10}$=30+10=40

Case (ii) EPS (Earnings per share)= 4, Dividend payout ratio is 100%

hence DPS(Dividend Per Share)= 4

hence P= $\frac{4}{0.10}$+0=40