SFM MODULE 4

DIVIDEND & RETENTION POLICIES

1. A Ltd is a listed company paying dividends every year. Its 5 year data is as follows:
Year 2006 2007 2008 2009 2010
Paid up capital lakhs 500 500 650 800 800 Analyze company’s dividend policy
Profit 125 132 195 265 280
Dividend paid 75 82.5 117 160 168

2. A ltd distributes at the rate of 21% and it has paid up share capital of Rs. 50 lakh of shares of Rs. 10 each. Annual
growth rate in dividend is 3%. Expected rate of return in equity capital is 16%. Calculate value of share based on
dividend growth model.
3. The EPS of a company is Rs. 8 and rate of capitalisation is 10%. The company has an option for adopting 50% or
75% or 100% dividend payout ratio. Compute market price of the shares as per Walter model if the return is 15%
or 10% or 5% on its retained earnings.
4. A ltd. Is having capitalisation rate of 10%. It currently has 1,00,000 shares of Rs. 100 each. The firm plan to
declare a dividend of Rs. 6 per share. Based on MM model and assuming no taxes, calculate share price if 1)
Dividend is declared or 2) Dividend is not declared. 3) Assuming firm pays dividend, and has the net income of
Rs. 10 lakhs, makes new investment of Rs. 20 lakhs, calculate number of new shares to be issued?
5. A Ltd. Is intending to acquire shares in Z Ltd. Beta of Z Ltd is 1.60 and the current market price is Rs. 190, also
the company consistently pays dividend of Rs. 46 p.a. if the risk free rate of market is 12%, expected return of
such securities is 18%, calculate value of Z Ltd.
6. Balance sheet of A Ltd. Is as follows:
Liabilities Rs Assets Rs
Equity share capital 10,00,000 Fixed assets 16,00,000
1,00,000 shares of Rs. 10 each Current assets 9,00,000
General reserve 15,00,000
Total 25,00,000 Total 25,00,000
Net profit after tax is Rs. 9,00,000. Company issued 1 bonus shares for every 2 shares held. Draw revised balance
sheet after bonus issue. Show impact on EPS.
7. Price of a company’s share is Rs. 80 and the value of growth opportunities is Rs. 20. If the company’s
capitalization rate is 15%, what is earnings-price ratio? How much is EPS?
8. A ltd. Has EPS of Rs. 11.04 in 2010 and paid out dividend of Rs. 6 per share. The growth rate in earnings and
dividend is expected to be 6% and the return on equity is expected to be 14%. Beta of the firm is 0.8 and the risk
free rate is 6%, while market premium is 4%, find out price to book value ratio for the firm
9. A ltd is expected to grow at 10% p.a. last dividend was Rs. 3.5 per share. If the equity capitalisation rate is 12%,
find out implicit PE ratio, if the EPS is Rs. 7
10. Current price of a share is Rs. 60 and dividend per share is Rs. 4. If the capitalisation rate is 12%, calculate
dividend growth rate.
11. Shares of a company are selling at Rs. 20 per share. The firm last paid dividend of Rs. 2 per share and the
estimated growth rate is 5%. Determine cost of equity. Also find out market price if the growth of the firm, 1)
rises to 8% or 2) falls to 3%
12. An investor is holding 1000 shares of a company. Current rate of dividend is Rs. 2 per share and the share can be
sold at Rs. 25 per share. Several factors are likely to change during the year which are as follows:
Particulars Existing Revised In the view of the above factors, whether
Risk free rate 12% 10%
the investor should buy, hold or sell the
Market risk premium 6% 4%
shares? Why?
Beta 1.4 1.25
Growth rate 5% 9%

13. A Ltd paid dividend of Rs. 2 per share. Its earnings & dividends are expected to grow at 8%. Beta of the company
is 1.3. if the risk free rate of return is 6% and return on market portfolio is 10%, calculate price per share. Find
the effect on the price if, expected growth rate increases by 1%

Edited by: Prof. Riddhi Sanghvi

14. A company has total investments of Rs. 5,00,000 in assets and 50,000 equity shares at Rs. 10 per share. It earns a
rate of 15% on investment, and has a policy of retaining 50% of the earnings. If the discount rate is 10%,
determine price per share using Gordon Model. Calculate price if payout is 80% or 20%
15. A company pays dividend of Rs. 2 per share with growth rate of 7%. Risk free rate is 9% and the market return is
13%. The company has a beta of 1.50. it is assumed that the beta is likely to increase to 1.75. find out present as
well as likely value of the share.
16. A share of a company is currently quoted at a price earning ratio of 7.5 times. The retained earnings per share
being 37.5% and is Rs. 3 per share. Compute:
Company’s cost of equity, if the growth rate is 12%
If the anticipated growth rate is 13% calculate price, with same coat of capital.
If the cost of capital is 18% and growth rate is 15%, calculate market price, assuming other things remain same.

17. A company has paid out 75% of earnings as dividends. Its present ROE is 30% and it plans to maintain both in the
long run. Currently the share price trades at Rs. 150. Suggest whether the share is overvalued? Consider current
EPS of Rs. 10, beta 0.75, risk free rate 6% and market premium 8%
18. A firm is planning to raise Rs. 20,00,000 in current year. The debentures can be issued at 14% while equity shares
can be issued at Rs. 50 per share. Company expects to pay Rs. 5 as dividends per share at the end of the year.
Required rate of return is 16%. Determine growth rate of the company. If the growth rate is 8%, calculate price
per share. If the growth rate is only 4%, which form of financing can be selected?
19. Considering following information, current dividend is Rs. 2.5, discount rate of 10.5% and growth rate of 2%,
calculate price per share. Is stock over valued if it trades at Rs. 35, ROE = 9% and EPS = Rs. 2.25?
20. A firm paid dividend of Rs. 2 last year. Estimated growth rate is 5%. Determine the market price of the share if
rate of dividends rises to 8% or falls to 3%. Also find out current price if required rate of return is 15.5%.
21. Price of a company’s share is Rs. 100 and the value of the growth opportunities is Rs. 20. If the capitalisation rate
is 20%, what is earnings-price ratio?
22. Dividends of a company are expected to grow at 25% for 2 years, after which the growth rate is expected to fall
to 5%. Last dividend paid was Rs. 2 and the investor desires a 12% return. Find value of stock.
23. Consider the following data of a company, and the assumption of the data analyst that the company’s shares are
overvalued by 10%.
Year Total dividend Rs. Number of shares Total earnings Current share price is Rs. 75 and cost of
2007 1,13,000 57,200 3,65,200 equity is estimated to be 12%
2008 1,22,680 57,200 4,26,400
2009 1,62,160 70,000 5,34,200
2010 2,00,140 80,000 5,72,400

24. A ltd is estimating growth of 12% in next 2 years. Growth rate is likely to fall to 10% for third and fourth year.
After that it will stabilize at 8%. If last dividend paid was Rs. 1.50 per share and required rate of return is 16%,
calculate intrinsic value per share.

Edited by: Prof. Riddhi Sanghvi