CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Aarav Ltd has cost of equity (ke) of 12%, return on investment (r) of 15% and earnings per share of Rs 10. Using Walter's model with a 40% payout ratio, what is the market price per share?
Walter's model gives price as dividend plus (r/ke) times retained earnings, divided by ke. With D 4, retention 6, r/ke 1.25, the numerator is 11.5, and dividing by 0.12 gives about Rs 95.83.
- ARs 96.67Correct
- BRs 91.67
- CRs 100.00
- DRs 83.33
Explanation
D = 40% of 10 = Rs 4; retained E - D = Rs 6. P = [D + (r/ke)(E-D)] / ke = [4 + (0.15/0.12)(6)] / 0.12 = [4 + 7.5] / 0.12 = 11.5/0.12 = Rs 95.83. Recheck: (0.15/0.12)=1.25; 1.25 x 6 = 7.5; 11.5/0.12 = 95.83. The nearest listed value does not match, so verify: 11.5/0.12 = 95.83, hence the stated key is incorrect.
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