NOBLE GROUP OF INSTITUTIONS – DEPARTMENT OF MANAGEMENT

MBA SEMESTER 2 – FINANCE

Module 4 – Dividend Decision & Firm Value

Submission: 7th March, 2018

1. A company earns Rs. 10 per share at an internal rate of 15%. The firm has a policy of paying 40% of earning as
dividends. If the required rate of return is 10%, determine the price of the share under (i) Walter’s Model and (ii)
Gorden’s Model

2. Explain a stock split? Why is it used? How does it differ from a bonus shares

3. The shares of Firm A and Firm B have identical risk. Both have an after-tax required rate of return of 15%. Firm A
pays no dividend, while Firm B is a high dividend paying firm. The price of Firm A’s share is expected to be Rs. 60
after one year and the price of Firm B Rs. 50 with Rs. 10 dividend per share. Assume that the income tax rate is 40%
and capital gain tax rate is 20%. Determine the current price of Firm A’s and Firm B’s shares.

4. What is meant by the buyback of shares? What are its effects? Is it really beneficial to the company and
shareholders?

5. Explain the Walter’s dividend model giving its assumptions and shortcomings.
6. What is a bonus issue ? What are its advantages and disadvantages?

7. Explain the factors that generally influence the dividend policy of the firm.

8. M Ltd. belongs to a risk class of which the appropriate capitalization rate is 12%. It currently has 90,000 shares
selling at Rs. 100 each. The company is contemplating declaration of a dividend of Rs. 5 per share at the end of the
current fiscal year which has just begun. Answer the following based on Modigliani and Miller Model and
assumption of no taxes.
(i) What will be the price of the shares at the end of the year if a dividend is not declared ?
(ii) What will be the price if dividend is declared ?
(iii) Assuming that the company pays dividend, has net income of Rs. 12 lakhs and makes a new investment of Rs. 25
lakhs during the period, how many new shares should be issued ?

9. G limited has invested Rs.500 lacs in assets. There are 50 lacs shares outstanding. The par value per share is Rs.10. It
earns a rate of 15% on its investment and has a policy of retaining 50% of earnings. If the appropriate discount rate
of the company is 10%, what is the price of its shares using the Gordon’s model? What will happen to the price of
the share if the company has a payout of 80% or 20%?

10. Critically examine the assumptions underlying the Irrelevance hypothesis of Modigliani and Miller (MM) regarding
dividend distribution

11. Shareholders want more dividend pay out to meet with their need of regular income. The company wants less
dividend payout to retain more funds for projects. While striking the balance, the company has to consider the
constraints pertaining to payment of dividends. Discuss these constraints

12. Following are the details of Maya Ltd.

Earnings of the company Rs.10,00,000 Dividend payout ratio 60% No.of shares outstanding 2,00,000
Rate of return on investment 15% Equity capitalization rate 12%
(i) What would be the market value per share as per Walter’s model?
(ii) What is the optimum dividend payout ratio according to Walter’s model and the market value of company’s share at
that payout ratio?

1|edited by: Prof. Riddhi Sanghvi

 NOBLE GROUP OF INSTITUTIONS – DEPARTMENT OF MANAGEMENT
MBA SEMESTER 2 – FINANCE
Module 4 – Dividend Decision & Firm Value

13. ABC Ltd has a capital of Rs. 10,00,000 in equity shares of Rs. 100 each. The shares are currently quoted at par. The
company proposes a dividend of Rs. 10 per share at the end of current financial year. The capitalization rate to the
risk to which company belongs is 12%.
What will be the market price of the share at the end of the year if (i) Dividend is not declared (ii) Dividend is declared
(iii) Assuming that the company pays the dividend and has net profit of Rs. 5,00,000 and makes new investments of Rs.
10 lakhs during the period, how many new shares must be issued? Use the M.M. model.

14. X Ltd. has 8 lakh equity shares outstanding at the beginning of the current year. The current market price per share
is Rs. 120. The Board of directors of the company is contemplating Rs. 6.4 per share as dividend. The rate of
capitalization, appropriate to the risk-class to which the company belongs, is 9.6 per cent.
(i) Based on M-M approach, calculate the market price of the share of the company, when the dividend is- (a) declared
and (b) not declared.
(ii) How many new shares are to be issued by the company, if the company desires to fund an investment budget of Rs.
3.20 crore by the end of the year assuming net income for the year will be Rs. 1.60 crore?

15. The EPS of a company is Rs. 16. The market capitalization rate applicable to the company is 12.5 per cent. Retained
earnings can be employed to yield a return of 10 per cent. The company is considering a pay-out of 25 per cent, 50
per cent and 75 per cent. Which of these would maximize the wealth of shareholders as per Walter’s model?

16. Maze Limited is facing gloomy prospects. The earnings and dividends are expected to decline at the rate of 4%. The
previous dividend was Rs. 1.50. If the current market price is Rs. 8.00, what the rate of return do investors expect
from the stock of Maze Limited?

17. The following information is available for Premji Company:

Earnings per share Rs. 5 Rate of return required by shareholders 16% Assuming that the Gorden Valuation
model holds, what rate of return should be earned on investments to ensure that the market price is Rs. 50 when the
dividend payout is 40%.

18. Discuss the factors which are relevant for determining the Dividend Payout Ratio.

19. The following information is available for Avanti Corporation. Earnings per share Rs. 4 Rate of Return on investments
18% Rate of Return required by shareholders 15% What will be the price per share as per the Walter Model if the
payout ratio is 40%, 50% and 60%?

20. What are the common objections and key regulations applicable to Share Buybacks?

21. The net profit for the Tirth corporation for the year 2016 is Rs. 20,00,000. The number of outstanding shares are
5,00,000. The rate of return on the investment is 18%. The rate of return required by the shareholders is 15%.
Calculate the price per share as per Walter Model and Gordon Model if the dividend payout ratio is 40% and 60%.

22. Assume that a firm has current earnings of Rs.12 per share. It can use these earnings in projects that provide a
return of 15%. The expected return to shareholders is 20%. What is the value of the firm under Walter’s Model and
Gordon’s Model, if it retains 50%, 60% and 80% of the earnings?

23. Excel Ltd is providing 25% returns to its shareholders. The current market price of its share is Rs. 80 with 1.25 crore
shares outstanding. The firm is expected to earn Rs. 4 crore in the year, while its investment requirement is Rs. 6
crore. The company is distributing dividend at 75% of the earnings. To meet the expansion budget, company is
thinking of skipping the dividend. You are supposed to calculate the value of the firm under two situations. I) When
company continues with its policy of declaring dividend and II) When the company skips the dividend
2|edited by: Prof. Riddhi Sanghvi