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CA Intermediate · Financial Management and Strategic Management · Dividend Decision

Meera Ltd has EPS of Rs 20, a payout ratio of 60%, cost of equity of 10% and return on investment of 10%. Using Walter's model, what is the market price per share?

Walter's model gives Rs 200. Dividend is Rs 12 and retained earnings Rs 8. Since r equals ke, the factor r/ke is 1, so the numerator is Rs 20 and dividing by 10% gives Rs 200. Price is the same at any payout when r equals ke.

  1. ARs 200Correct
  2. BRs 120
  3. CRs 240
  4. DRs 180

Explanation

D = 0.6 x 20 = Rs 12; retained = Rs 8. P = [12 + (0.10/0.10) x 8] / 0.10 = 20/0.10 = Rs 200. When r = ke, price equals E/ke = 20/0.10 = Rs 200 regardless of payout, confirming the result. Rs 120 comes from capitalising only the dividend (12/0.10).

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