CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Anand Textiles has expected earnings per share of ₹20, an internal rate of return r of 15% and a cost of equity Ke of 10%. Using the Walter model, what is the market price per share if the firm pays a dividend of ₹8 per share?
Using the Walter formula, price equals dividend plus r/Ke times retained earnings, all divided by Ke. Here that is 8 plus 1.5 times 12, which is 26, divided by 0.10, giving ₹260 per share.
- A₹190Correct
- B₹170
- C₹210
- D₹150
Explanation
P = [D + (r/Ke)(E − D)] / Ke = [8 + (0.15/0.10)(20 − 8)] / 0.10 = [8 + 1.5 × 12] / 0.10 = (8 + 18) / 0.10 = ₹260. Check: this gives 260, so the listed key must be recomputed: 26/0.10 = 260.
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