DIVIDEND DECISION

Q1

a.

Market price per share of the company at the end of the year (i.e P1)
i.
When dividend not paid

ii.

b.

P0

150

P1
P1

=
=

150( 1.12) - 0
168

When Dividend paid

P0

150

P1
P1

=
=

150( 1.12) - 8
160

New shares to be issued by the company (i.e m)

i.
When dividend not paid
m

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=
=
ii.

1,19,047.619047 shares

When dividend paid

m

=
=
=

c.

1,75,000 shares

Value of Firm (i.e nP0)

i.
When dividend not paid
nP0

=
=
=

ii.

Rs 1500 lakh

When dividend paid

nP0

=
=
=

Rs 1500 lakh

Thus market value of the Firm is same (Rs 1500 lakh) whether dividend is paid or not

Q2

a.

Market price per share of the company at the end of the year (i.e P1)
I
When dividend not paid

ii

b.

P0

125

P1
P1

=
=

125( 1.08) - 0
135

When Dividend paid

P0

125

P1
P1

=
=

125( 1.08) - 6
129

New shares to be issued by the company (i.e m)

i.
When dividend not paid
m

=
=
=

ii.

2962.962962 shares

PRAVINN
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When dividend paid

m

=
=
=

c.

4961.240310 shares

Value of Firm (i.e nP0)

i.
When dividend not paid
nP0

=
=
=

ii.

Rs 50 lakh

When dividend paid

nP0

=
=
=

Rs 50 lakh

Thus market value of the Firm is same (Rs 50 lakh) whether dividend is paid or not

Q3

a.

Market price of share according to MM approach

i.

ii.

b.

When dividend not paid

P0

15

P1
P1

=
=

15( 1.14) - 1.35

15.75

When Dividend paid

P0

15

P1
P1

=
=

15( 1.14) - 0
17.10

Expected return after tax

i.

ii.

If dividend paid
Dividend Received
Dividend after ordinary tax

=
=
=

Rs 1.35
1.35 ( 1 0.3 )
0.945

Capital gains

=
=

15.75 15
0.75

Capital gains after tax

=
=

0.75( 1 0.26)
0.555

Total Income after Tax

=
=

0.945 + 0.555
1.5

Investment

Rs 15

Rate of Return

x 100

10%

Capital gains

=
=

17.10 15
2.1

Capital gains after tax

=
=

2.1( 1 0.26)
1.554

Investment

Rs 15

Rate of Return

If dividend paid

x 100
10.36%

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Q4

If r = 20% ( i.e r > ke )

If r = 10% ( i.e r = ke )

If r = 8% ( i.e r < ke )

1. DP ratio 10% i.e b = 90 %

1. DP ratio 10% i.e b = 90 %

1. DP ratio 10% i.e b = 90 %

P0 =

P0 =

P0 =

= Rs 180

= Rs 100

= Rs 84

2. DP ratio 40% i.e b = 60 %

2. DP ratio 40% i.e b = 60 %

2. DP ratio 40% i.e b = 60 %

P0 =

P0 =

P0 =

= Rs 160

= Rs 100

= Rs 88

3. DP ratio 80% i.e b = 20 %

3. DP ratio 80% i.e b = 20 %

3. DP ratio 80% i.e b = 20 %

P0 =

P0 =

P0 =

= Rs 120

= Rs 100

= Rs 96

4. DP ratio 100% i.e b = 0 %

4. DP ratio 100% i.e b = 0 %

4. DP ratio 100% i.e b = 0 %

P0 =

P0 =

P0 =

= Rs 100

= Rs 100

= Rs 100

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Q5

E= Rs 6, kE = 10%, r= 20% , DP = 30%

P0

PRAVINN
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=
= Rs 102

According to Walter model, if r > KE , optimum DP ratio is 0% i.e Retention ratio should be 100%.
In given question DP is 30%, so it is not optimum ratio
Q6

Earnings of company
No. of shares
EPS
DP ratio
Dividend per share
i.

=
=
=
=
=

Rs 10,00,000
2,00,000
Rs 5
60%
Rs 3 per share

Market value per share as per Walters model

P0

=
=
ii.

Rs 34.26

According to Walter model, if r > KE , optimum DP ratio is 0% i.e Retention ratio should
be 100%. If DP ratio is 0% then MP will be
P0

=
=

Rs 52.083

Q7

Statement of EPS
Earnings
Less Preference dividend
12 % of 100 lakhs
Earnings for equity share holders
No. of shares
EPS
r

KE

PE

KE

30,00,000
12,00,000
18,00,000
3,00,000
Rs 6 per share

20%

x 100

14.285714%

Dividend per share if MP is Rs 42 per share

P0

42

42 x 0.14285714

DP ratio

d +

d + 8.4 - d

6 8.4 =

d(1 -

- 2.4

- d ( 0.40)

=
=
=

6
x 100
100 %

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Q8

Earnings
No. of shares
EPS

Rs 2,00,000
20,000
Rs 10 per share

Total dividend
Dividend per share

Rs 1,50,000
Rs 7.5

KE

=
=

Current DP ratio 75%

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MAHAJAN
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x 100

=
=

0.08 or 8%

x 100
10%

If DP ratio is 75%, then according to Walter model MP of share is

P0

=
=
Rs 132.81
According to Walter model if r > KE , then optimal dividend policy would be to pay Zero dividend.
Thus DP ratio 75% is not an optimum dividend policy. If no dividend is paid MP will be
P0

=
=
Rs 156.25
So, MP can be increased by adopting a Zero dividend policy
ii.

Companys Dividend policy will have no effect on the market value of share if r = K E ,
i.e KE = 10%, And since PE =
So, PE at which dividend policy has no effect on market value of firm is

iii.

IF PE is 8 instead of 12.5, then

which is the inverse of PE ratio would be 12.5 (i.e

such a situation KE > r and Market price as per Walter model would be
P0

=
=

= 10 times

Rs 76

Since r < KE , optimum DP ratio will be 100%

) and in

Q9

Market price of share

Walter model

P0

=
=
Gordon Model

P0

Rs 55

=
=
=

Q10

Rs 60

MP per share according to Gordon Model

Book value per share
Return on Equity
Thus earnings

=
=
=
=

Rs 137.80
15%
15% x 137.80
Rs 20.67

DP Ratio

=
=

1 - 0.6
0.4 or 40%

P0

=
=
=

Rs 91.87

MP per share according to Walter Model

P0

=
=

Rs 103.35

MP per share according to perpetual growth model

P0

=
=
=

Rs 91.89

PRAVINN
MAHAJAN
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Q11

a.

b.

MP of share
EPS
DP ratio
b
r

=
=
=
=
=

P0

40

Rs 40
Rs 12 per share
45%
1 0.45 =
0.55
14%

+ 0.077

0.212 or 21.2%

Dividend distributed during the year

=
=

Dividend per share

=
=

Value of share

P0

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10 Lakh x 10 x 0.20
Rs 20 lakh

Rs 20 per share

=
=
=

Q12

Rs 156.923

According to Linter model

Current Year dividend

= ( 1 - A) x Last Year Dividend + EPS X DP ratio x A

a. Last year Dividend = Rs 9.8

Adjustment
45%
Pay out ratio
60%
EPS
Rs 20
Current year dividend

b. If Adjustment is 20%
Current year dividend

Q13

= ( 1 0.45) 9.8 + 20 x 0.6 x 0.45

=
Rs 10.79

=
=

( 1 0.2) 9.8 + 20 x 0.6 x 0.2

Rs 10.24

According to Linter model

Current Year dividend

= ( 1 - A) x Last Year Dividend + EPS X DP ratio x A

Last year Dividend = Rs 1.2

Adjustment
0.7
Pay out ratio
0.6
EPS
Rs 3
Current Year dividend

= ( 1 0.7) 1.20 + 3 x 0.6 x 0.7

=
Rs 1.86

Q14

According to Linter model

Current Year dividend

= ( 1 - A) x Last Year Dividend + EPS X DP ratio x A

Last year Dividend = Rs 5

Adjustment
0.5
Pay out ratio
70%
EPS
Rs 10
Current Year dividend

PRAVINN
MAHAJAN
CA CLASESS
= ( 1 0.5) 5 + 10 x 0.7 x 0.5
=
Rs 6

If incremental dividend to be maintained is 70%

Current Year dividend

= ( 1 0.7) 5 + 10 x 0.7 x 0.7

=
Rs 6.4

If incremental dividend is 30%

Current Year dividend

Q15

a.

= ( 1 0.3) 5 + 10 x 0.7 x 0.3

=
Rs 5.6

According to residual approach, current years profits or earnings can be used for
financing capital expenditure and after financing capital expenditure, balance is
distributed as dividend
Current year profit

x 20

=
Rs 600,00,000
So, capital expenditure of Rs 600,00,000 can be incurred without raising additional equity
b. i.

Equity Funds
ESC
Reserves

300,00,000
1500,00,000
1800,00,000

Debt
12% debt
15% debt
Debt equity ratio

Capital expenditure
Raised from equity

1000,00,000
200,00,000
1200,00,000
=
12 : 18
=
2:3
=

550 lakh

reserves

550 lakh x

Raised from debt

=
=

Rs 330 lakh
Rs 220 lakh

=
=

Rs 600 lakh Rs 330 lakh

Rs 270 lakh

Dividend distribution

ii.

c.

Dividend distribution without bothering about capital structure

Rs 600 lakh 550 lakh
=
Rs 50 lakh

PRAVINN
MAHAJAN
CA CLASESS

If capital expenditure is Rs 800 lakh

i.

Dividend distribution without affecting capital structure

Debt equity ratio

2: 3

Capital Expenditure financed by equity reserves

800 lakh x

ii.

Dividend distribution

=
=

Dividend per share

= Rs 480 lakh
600 lakh 480 lakh
120 lakh
= Rs 4 per share

Dividend distribution without bothering about capital structure

Since capital expenditure of Rs 800 lakh is more than available profit of
Rs 600 lakh, so nil dividend

Q16

i.

Statement of Dividend per share and external financing under residual approach
Particulars

Profit after tax

Capital expenditure

40
10

45
50

50
20

35
50

Profit for distribution

30

30

Dividend per share

(no of shares 8 crore)
External financing

3.75
-

3.75
-

15

ii

Statement of Dividend per share and external financing if Debt equity ratio
of 7:3 is to be maintained
Particulars

Profit after tax

Capital expenditure

40
10

45
50

50
20

35
50

Capital Expenditure from equity 10 x

PAT for distribution
Dividend per share
External financing

=3

37

50 x

= 15

30
= 4.625

10 3 = 7

20 x

=6

44

50 x

= 15

20

= 3.75

= 5.5

50 15 = 35

20 6 = 14

= 2.5
50 15 = 35

iii.

Statement of Dividend per share and external financing required

if Dividend Pay-out ratio is 40%
Particulars

Profit after tax

Capital expenditure

40
10

45
50

50
20

35
50

Profit for dividend (40%)

16

18

20

14

Dividend per share

Profit for capital exp.
External financing
iv.

=2
24
-

= 2.25
27
23

= 5.5
30
-

= 2.5
21
29

Statement of Dividend per share and external financing if DP ratio

is 30% and minimum dividend per share to be Rs 1.5 per share

Particulars
Profit after tax
Capital expenditure

1
40
10

2
45
50

3
50
20

4
35
50

Total dividend, if div per share

is Rs 1.5 per share

12

12

12

12

Total dividend if
DP ratio is 30%

12

13.5

15

10.5

Dividend payable
Dividend per share

12
1.5

13.5
1.6875

15
1.875

12
1.5

Profit for cap exp.

28

31.5

35

23

External financing

18.5

27

v.

II

III

IV

3.75
60 cr
20 cr

16.375
131 cr
91 cr

8.5
68 cr
52 cr

6.5625
52.5 cr
45.5 cr

Div per share

Total Dividend
External financing

In case II both shareholders and Financial institutions will be happy

PRAVINN
MAHAJAN
CA CLASESS

Q17

Statement of Current market Price

A
640
p
640 p
64 0.10p

B
600
q
600 q
60 0.10q

Capital gains after tax

(640 p) (64 0.10p)

= Rs 576 0.90p

(600 q) (60 q)
= Rs 540 0.90q

Dividend receivable
Less tax on dividend 15%

Rs 40
Rs 6

Dividend income after tax

40 6 = Rs 34

Return on investment in shares

Rs 576 0.90p

540 0.90q + 34

Return on investment

16%

16%

Current MP

0.16 =

0.16 =

Market value of share after 1 year

Less Current market price
Capital gains
Less tax on capital gains @ 10%

p
Q18

= 543.40

p = 541.51

Statement of cash flow if dividend distributed Now

Earnings per share
Dividend Pay out
No. of share outstanding
Total dividend pay-out

( 60 x 2crore)

x 12,000

Less Dividend distribution tax

Rs 200
Rs 60
2 crore
12000 lakh
1655.17 lakh

Amount received by investors

Rs 10344.83 Lakh

Amount invested in Bank

Rs 10344.83 lakh

Interest on Bank deposits

9%

Personal Income tax at 25% on 9% interest

Effective interest rate on deposits
Post maturity value of deposits

2.25%
6.75%

10344.83 x (1.0675)

Rs 12,584.49 lakh

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Statement of cash flow if dividend distributed 3 years later

Earnings per share
Dividend pay-out (200 x 0.3)
No of shares outstanding
Total amount payable for dividend pay-out
Amount invested in Bank by MPL
Interest on Bank deposits
Corporate tax rate on Interest 34% of 11%
Effective Interest rate
Maturity value of deposits

rs 200
Rs 60
2 crore
Rs 12000 lakh
Rs 12000 lakh
11%
3.74%
7.265

12000 lakh (1 + 0.0726)

14,808 lakh

Less dividend distribution tax 14,808 lakh x

2042.48 lakh

Amount available for investors

12,765.52 lakh

It is better for company to retain the dividend payout and invest the same in Bank and
distribute after 3 years, as it yields higher return to investors
Q19

d0
g
KE

=
=
=

Current Market price

Q20

Rs 2
5%
10( 1 0.3) = 7%
P0

Before budget announcement

= Rs 42

After Budget announcement

= rs 94.50

PRAVINN
MAHAJAN
CA CLASESS

If the company invests Rs 1000 in Market

Pre tax rate of return on investment
Corporate tax rate
Effective rate of return on investment

=
=
=
=

8%
36.75%
8(1-0.3675)
5.06%

Matured value of deposit

=
=

1000(1.0506)
Rs 1279.93

Dividend payable

Rs 1279.93

Rs 142.21

Rs 1137.72

Less dividend distribution tax

12.5%

Amount available to shareholders

1279.93 x

If dividend is distributed Now

Dividend to be distributed
Dividend distribution tax

Rs 1000
1000 x

Rs111.11

Amount available to shareholders

Rs 888.89

Amount invested in bank for 5 years

Rs 888.89

Rate of Interest
Income tax rate for shareholders
Effective ROI

8%
30
8 ( 1 0.3)
5.6%

Amount in the hands of investors

888.89(1.056)
Rs 1167.26

PRAVINN
MAHAJAN
CA CLASESS

Company should distribute dividend today and shareholder should invest in bank, as it will
increase yield of shareholders
Q21

i.

Statement of Post tax return of A

Amount invested
Rs 100
Dividend paid by co.
Rs 15
Tax on dividend
30%
Rs 4.5
Dividend income after tax
Rs 10.50
Return after tax

ii.

x 100

10.50%

Statement of Post tax return on share of B

Amount invested
Rs 100
Appreciation in value of share
15% p.a ( assumed compounded)
MP of share after 2 years
100(1.15)
Capital gain
Tax on capital gain
30% x 32.25
Capital gain after tax
Return after tax

iii.

x 100

Rs 132.25
32.25
Rs 9.675
Rs 22.575
22.575 5 for 2 years i.e 11.2875% p.a

Statement of Post tax return of A (if tax on dividend is 10%)

Amount invested
Rs 100
Dividend paid by co.
Rs 15
Tax on dividend
10%
Rs 1.5
Dividend income after tax
Rs 13.50
Return after tax

x 100

13.50%

Statement of Post tax return on share of B (if tax on capital gains 15%)
Amount invested
Rs 100
Appreciation in value of share
15% p.a ( assumed compounded)
MP of share after 2 years
100(1.15)
Capital gain
Tax on capital gain
15% x 32.25
Capital gain after tax
Return after tax
Q22

x 100

27.4125 % for 2 years i.e 13.706% p.a

=
=

Rs 144.44

Current market price of share is present value of all future dividends.

Co is planning to pay ( 5 x 1.2) Rs 6 per share indefinitely
Current market price

=
=

Q24

Rs 132.25
32.25
Rs 4.8375
Rs 27.4125

Current market price of share is present value of all future dividends. Co is paying Rs 13 per
share indefinitely
Current market price

Q23

Rs 30

Current market price of share is present value of all future dividends.

If life expectancy of MD is 20 years, then company will pay dividend of Rs 30 per share
indefinitely from year 21
Current market price

=
=

x 0.149
Rs 44.70

Market Price of share if company pays a dividend of Rs 5 per share indefinitely

Current market price

=
Rs 50 per share
Thus if MDs dividend policy is adopted Value of share is reduced by Rs 5.30 per share

PRAVINN
MAHAJAN
CA CLASESS

Q25

a.

Current market price of share is present value of all future dividends.

P0

=
=

i.

Rs 30

Rs 32.786

Earning Price Model

P0

=
=

If Current market price per share is Rs 35 , share is overvalued

ii

According to PE model
PE

=
=

Current market price

Q26

a.

9.524 times

=
=
=

PE x EPS
9.524 x 2.25
Rs 21.429

Growth rate of dividends

4

d5

d1 ( 1 + g)

14.03

10.7 ( 1 + g )

( 1 + g) =
g

b.

=
=

1.0700 1
0.07 or 7%

Cost of Equity on old shares

KE

+ g

=
=

+ 0.07
19%

PRAVINN
MAHAJAN
CA CLASESS

c.

Cost of equity of new shares

KE

+ g

+ 0.07

=
Q27

d0
g
Ke

=
=
=

PRAVINN
MAHAJAN
CA CLASESS

19.38 %

Rs 2
5%
15.5%

a. MP If g is 5%
P0

=
=

Rs 20

Rs 28.8

Rs 16.48

b. MP if g is 8%
P0

=
=

c.

MP if g is 3%
P0

=
=

Q28

Growth rate
1 2 year
3 4 year
th
From 5 year
d0

=
=
=

12%
10%
8%

Rs 1.50

r = 16%

Current Market price or intrinsic value of share is Present value of all future dividends
Current market price

= Present value of d1 to d4
=
=
=

+ Present value of P4

1.68 x 0.862 + 1.88 x 0.743

x 0.552

+ 2.068 x 0.640 + 2.274 x 0.552

5.42
+
16.94
22.36
(PTO)

st

Price at the end of 1 , 2

Year

Year

nd

rd

th

th

, 3 , 4 , 5 year

P0

22.36

P1

P1

PRAVINN
MAHAJAN
CA CLASESS

24.257

24.257 =

Year 3

P2

P2

26.25812

Year 4

P3

P3

28.3914

Year 5

Q29

d0
g
r

=
=
=

26.25812

28.3914

=
P4

P4

30.66

P5

P0

30.66

33.10

3.50
6%
15%

Intrinsic value of share

Rs 41.222

If Current market price is Rs 50, g is

P0

=
50

7.5 - 50g
=
53.5 g =
g

3.5 + 3.5g
4
=

0.0748 or 7.48%

Q30

Growth rate
1 2 years
3 5 years
67
Above 7

10%
12%
12.50%
11%

d0
r

=
=

Rs 5
17.5%

Current market price is present value of all future outflows

Year
1
2
3
4
5
6
7

Dividend / outflow
5.50
6.05
6.776
7.589
8.5
9.5625
10.758

Q31

earnings
Shares
KE
i.

= 183.714

factor
0.851
0.724
0.616
0.525
0.446
0.380
0.323

Present value / Price

4.681
4.380
4.174
3.984
3.791
3.634
3.475

0.323

59.340

Current market price

87.459

2.4 lacs
1 lac
12%

PRAVINN
MAHAJAN
CA CLASESS

MP if all earnings are distributed as dividend

PE

=
=

or
CMP

= 8.333 times

=
= Rs 20

ii.

PE

8.333

Price

Rs 20

If dividend payout is 50 % and earnings and dividends likely to grow by 8%

CMP

=
=

iii.

8.333 x 2.4

Rs 32.40

Earnings and dividends grow at 10% for 2 years and at 4 % thereafter

Year
1
2
2

Dividend

factor

Present value

2.4 x 1.1 = 2.64

2.904

0.893
0.797

2.358
2.314

= 37.752 0.797
Market price

30.088
34.76

Q32

E0

Growth rate of EPS

DP ratio
1 4 years
20%
-----25%
5 8 years
12%
-----40%
Above 8 years 6%
-----50%
th
th
At the end of 8 years PE ratio is 8.5 times, EPS in denominator is of 9 year
i.

Statement of annual EPS and DPS

Year
EPS
1
2.4
2
2.88
3
3.456
4
4.1472
5
4.645
6
5.2024
7
5.827
8
6.526
9
6.918

DPS
0.6
0.72
0.864
1.0368
1.858
2.081
2.331
2.6104
3.459

PRAVINN
MAHAJAN
CA CLASESS

Current market price is PV of all future dividends

th
th
PE (of 8 yr using 9 yr EPS) =
8.5
th
th
th
Price at the end of 8 yr
=
PE (8 yr) x EPS (9 yr)
=
8.5 x 6.918
=
Rs 58.803
Current Market Price

Present value of d1 - d8 + Present value of MP at the

th
End of 8 year
=
0.6 x 0.877 + 0.72 x 0.769 + 58.803 x 0.351
0.864 x 0.675 + 1.0368 x 0.592
1.858 x 0.519 + 2.081 x 0.456
2.331 x 0.4 + 2.6104 x 0.351
=
=

b.

6.039 + 20.640
Rs 26.68

Expected rate of Return, when stock price is Rs 30

Rate of return will be that rate at which present value of cash outflow (dividend) is equal
to cash inflow (MP) i.e rate at which PV of all dividend is $ 30
Present value of all cash outflows at 14%

Present value of cash outflow at 10%

=
0.6 x 0.909 + 0.72 x 0.826 +
0.864 x 0.753 + 1.0368 x 0.683 + 1.858
x 0.620 + 2.081 x 0.564 + 2.331 x 0.513
2.6104 x 0.467 + 58.803 x 0.467
=
Rs 34.70

Expected rate of return is

14

12.344%

x4

26.68

14%------------26.68
? ------------- 30
10%------------34.70
For diff of IRR of 4%, change in price is
8.02, for diff in rate of 3.32 Change in
price is 14 -

x4

Q33

PE ratio = 7.5
Retained earnings

Rs 3 (37.5%)

Total earnings
i.

= Rs 8 per share

MP

=
=
=

KE

PE x EPS
7.5 x 8
Rs 60

ii.

P0

PRAVINN
MAHAJAN
CA CLASESS

+ g

=
=

Div per sh = 8 3 = 5

+ 0.12
21.33%

=
=
=

iii.

P0

Rs 67.80

=
=
=

Q34

Rs 191.67
Statement of profit after Tax

Operating Profit
Less Interest on secured loan
Interest on unsecured loan
Profit before tax
Tax
Profit after tax
Number of equity shares

2,50,000

EPS

PE ratio (given)
Value of share
Q35

EPS0
DPS0
Current PE
i.

25,00,000
3,75,000
1,25,000
20,00,000
10,00,000
10,00,000

=
=
=

Current MP

P0

12.5
Rs 50

4 x 12.5

Rs 5
Rs 2
7 times

Growth rate

Past 4 years
Future

= 14%
=
=

Estimated PE ratio

( 25 lac x 0.15)
(10,00,000 x 0.125)

= Rs 17
=

3.4 times

4%
2%

ii.

Current PE ratio
Current EPS
Actual price in the market

P0

35

35 (0.14 - g)
4.9 - 35g
37 g
g
Q36

d1
g
RF
r

=
=
=

=
=
=
=

7 times
5
7x5 =

Rs 35

2 ( 1 + g)
2 + 2g
2.9
0.0784 or 7.84%

Rs 2 per share
7%
9%
13%
1.5 , likely to increase to 1.75
KE

=
=
=

P0

PRAVINN
MAHAJAN
CA CLASESS

R F + ( R M - R F)
9 + 1.5 (13 9)
15%

Rs 26.75

If increased to 1.75
KE

=
=
=

P0

R F + ( R M - R F)
9 + 1.75 (13 9)
16%

=
Q37

RF
=
RM - RF =

10%
5%
1.6

Growth rate

Rs 23.778

d (2002) = d7
d (1996) = d1

=
=

Rs3
Rs 2.115

d7
3

=
=

d1 ( 1 + g )
6
2.115 ( 1 + g)

- 1

0.06 or 6%

Cost of Equity

P0

=
=
=

R F + ( R M - R F)
10 + 1.6 (5 )
18%

PRAVINN
MAHAJAN
CA CLASESS

=
Q38

i.

ii.

d1
DP ratio

=
=
=

EPS

Rs 7
(1 0.3)
0.7
= Rs 10

g = b.r
0.06 = 0.3 x r
r

iii.

Rs 26.5

= 0.2 or 20%

Value of share
(along with growth
Opportunities)

Value of share without

growth opportunities

=
175
Vg

Q39

KE
P0
Value of growth opportunities
Value of share without growth
Value of share
(along with growth
Opportunities)

=
=
=

100 + Vg
175 - 100
Rs 75

=
=
=
=

15%
Rs 80 ( after growth)
Rs 20
Rs 80 Rs 20 =

Value of share without

growth opportunities

60

EPS

=
=

60 x 0.15
Rs 9

Earning Price Ratio

Growth
opportunities

Vg

Growth
opportunities

Vg

Vg

Rs 60

=
80

20

0.1125