Skip to content

CS Executive · Corporate Accounting and Financial Management · Dividend Decisions

Sundaram Ltd has EPS of Rs 10, pays a dividend of Rs 4 per share, earns a return of 15% on investments and has a cost of capital of 10%. Using Walter's model, the market price per share is:

The Walter's model price is Rs 130. Dividend of Rs 4 plus retained Rs 6 multiplied by r/k of 1.5 gives Rs 9, so the numerator is Rs 13. Dividing Rs 13 by the cost of capital of 10% gives Rs 130 per share.

  1. ARs 100
  2. BRs 130Correct
  3. CRs 40
  4. DRs 115

Explanation

P = [D + (r/k)(E - D)] / k = [4 + (0.15/0.10)(10 - 4)] / 0.10 = [4 + 9] / 0.10 = Rs 130. Rs 100 is E/k, which is the price when r = k and wrongly ignores the growth advantage. Check: 13/0.10 = 130.

Did you get it right without looking?

One question tells you little. A timed set on Dividend Decisions shows your real accuracy, how long you take and where you lose marks.

Practise Dividend DecisionsFree diagnostic mock

More Dividend Decisions questions