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IAI Actuarial Core Principles · Business Finance · Key principles of finance

Kaveri Industries has 10 crore shares trading cum-dividend at Rs 120. It declares a dividend of Rs 8 per share. Ignoring taxes and market imperfections, and assuming MM dividend irrelevance holds, the company will pay the dividend and fund a new Rs 100 crore project entirely by issuing new shares at the ex-dividend price. How many new shares must it issue?

About 89.3 lakh shares. The ex-dividend price is Rs 120 minus Rs 8, or Rs 112. Raising Rs 100 crore at that price needs 100 crore divided by 112, roughly 0.893 crore shares. Using the cum-dividend price would understate the number.

  1. A80.0 lakh
  2. B83.3 lakh
  3. C89.3 lakhCorrect
  4. D1.00 crore
  5. 92.6 lakh

Explanation

Ex-dividend price = 120 - 8 = Rs 112. Shares needed = Rs 100 crore / 112 = 0.8929 crore, i.e. about 89.3 lakh shares. Using Rs 120 gives 83.3 lakh, which ignores the price fall on going ex-dividend. Using Rs 108 gives 92.6 lakh, which wrongly deducts dividend twice.

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