CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Sunrise Textiles Ltd has EPS of ₹20, cost of equity (Ke) of 10% and return on investment (r) of 15%. Using Walter's model, the market price per share if the firm pays a dividend of ₹8 per share is:
Using Walter's model, price equals dividend plus the ratio of return to cost of equity times retained earnings, all divided by cost of equity. That gives (8 + 1.5×12)/0.10, which is ₹260 per share.
- A₹200.00
- B₹220.00Correct
- C₹213.33
- D₹180.00
Explanation
P = [D + (r/Ke)(E − D)] / Ke = [8 + (0.15/0.10)(12)] / 0.10 = (8 + 18)/0.10 = ₹260. Recheck: (0.15/0.10)=1.5; 1.5×12=18; 8+18=26; 26/0.10=260. So the value is ₹260, which is not listed; correcting the key: none matches.
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