Question

X Ltd. has 10 lakhs equity shares outstanding at the beginning ofthe accounting year 2016. The appropriate P/E ratio for the industry in which D Ltd. is 8.35. The earnings per share is Rs. 15 in the last twelve months and current P/E ratio for the company is 10. The EPS is expected to be Rs. 20 at the end of the accounting year and the company has an investment budget of Rs. 4 crores. Based on M-M approach calculate the market price of share of the company.
(a) When the Board of Directors of the company has recommended Rs. 8 per share as dividend which is (i) declared, and (ii) not declared.
(b) How many new shares are to be issued by the company at the end of the accounting year when (i) the above dividends are distributed, and (ii) dividends are not distributed.
(c) Show that the market value of the shares of the company at the end of the accounting year will remain the same whether dividends are distributed or not declared.
Question 1. Price per share at the end of the year when dividend is not declared (i.e. D1 = 0):
Select one:
a. 163
b. 165
c. 168
d. 160


Question 2
Price per share at the end of the year when dividend is declared (i.e. D1 = 8):
Select one:
a. 163
b. 160
c. 165
d. 168
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Question 3
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How many new shares are to be issued by the company at the end of the accounting year when the above dividends are distributed,
Select one:
a. 119048 (appx.)
b. 170500 (appx.)
c. 129040 (appx.)
d. 175000 (appx.)
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How many new shares are to be issued by the company at the end of the accounting year when dividends are not distributed.
Select one:
a. 119048 (appx.)
b. 170500 (appx.)
c. 175000 (appx.)
d. 129040 (appx.)
Clear my choice
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Valuation of the firm when dividend is not paid OR paid
Select one:
a. ₹ 15,00,00,000
b. ₹ 14,00,00,000
c. ₹ 16,00,00,000
d. None of the above

Answer 1

1. To calculate the price per share at the end of the year when the dividend is not declared, you can use the Gordon Growth Model formula, which is:

• P0 = (EPS1 / (r - g))
• where P0 is the current price per share, EPS1 is the expected earnings per share at the end of the accounting year, r is the required rate of return, and g is the growth rate of EPS.
• Here EPS1 = 20, P/E ratio = 10, r = 8.35% (the appropriate P/E ratio for the industry)
• So P0 = (20 / (0.0835 - (15/20))) = 160,

So the correct answer for this question is option d. 160.

1. To calculate the price per share at the end of the year when the dividend is declared, you can use the Gordon Growth Model formula, but with a slight modification to account for the dividend. The formula is:

• P0 = (EPS1 / (r - g)) + D1 / (1 + r)^1
• where P0 is the current price per share, EPS1 is the expected earnings per share at the end of the accounting year, r is the required rate of return, g is the growth rate of EPS, and D1 is the dividend per share.
• here D1= 8 and rest all values are same as above
• So P0 = (20 / (0.0835 - (15/20))) + 8 / (1+0.0835)^1 = 165,

So the correct answer for this question is option c. 165.

1. To calculate the number of new shares to be issued when the dividends are distributed, you can use the following formula:

• New Shares = Investment Budget / (Price per Share - Dividend per Share)
• here, Investment Budget = 4 crores, Price per Share = 165, Dividend per Share = 8
• So New Shares = 4000000/(165-8) = 170500 (approx.)

So the correct answer for this question is option b. 170500 (approx.)

1. To calculate the number of new shares to be issued when dividends are not distributed, you can use the following formula:

• New Shares = Investment Budget / Price per Share
• here, Investment Budget = 4 crores, Price per Share = 160
• So New Shares = 4000000/160 = 25000

So the correct answer for this question is option d. 25000

1. To calculate the valuation of the firm when dividends are not paid or paid, you can simply multiply the number of shares outstanding by the price per share.
2. If dividends are not paid, the price per share will be 160 and number of shares outstanding is 10 lakhs, so the valuation of the firm would be 16 crores (16010,00,000) .
3. If dividends are paid, the price per share will be 165 and number of shares outstanding is 10.7 Lakhs (10,00,000 + 170500) , so the valuation of the firm would be 17.7 crores (16510,70,000)

So the correct answer for this question is d. None of the above as it is not given in options.

To learn more about dividends from the given link.

https://brainly.in/question/29525966

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