The earnings per share of a company is Rs. 8/- & rate of capitalization applicable is 10%. The company has before it, An option of adopting i) 50% ii) 75% iii) 100% Dividend payout ratio.
Compute market price of company’s quoted shares as per
Walter’s model
. If it can earn a return of 15%, 10% & 5% on its retained earnings.
Answers
Answer:
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Answer:
The market price of the company’s quoted shares as per Walter’s model will be
i) Rs. 100
ii) Rs. 80
iii) Rs. 80
Explanation:
Formula - P = D/ke + (r/ke) (e -d) / Ke
P = Market Price
D = Dividend
r = Rate of Return
Ke = Cost of Capital
E = Earning per share
D = Dividend
i) P = Market Price = Find
r = Rate of Return = 15%
Ke = Cost of Capital = 10%
E = Earning per share = 8
D = Dividend = 50% of E = 4
Putting all the values in the formula, we get
P = 100
ii) P = Market Price = Find
r = Rate of Return = 10%
Ke = Cost of Capital = 10%
E = Earning per share = 8
D = Dividend = 75% of E = 6
Putting all the values in the formula, we get
P = 80
iii) P = Market Price = Find
r = Rate of Return = 5%
Ke = Cost of Capital = 10%
E = Earning per share = 8
D = Dividend = 100% of E = 8
Putting all the values in the formula, we get
P = 80
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