CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Under the MM model, Sagar Ltd has 10,000 shares, opening price ₹50, ke 10%, and declares a dividend of ₹2 per share. The firm needs no new funds if it pays the dividend. What is the price at the end of the year, P1?
The year-end price is ₹53. From the MM formula, P1 equals P0 times (1 plus ke) minus D1, so 50 times 1.10 gives 55, and deducting the ₹2 dividend leaves ₹53.
- A₹55
- B₹53Correct
- C₹57
- D₹52
Explanation
P1 = P0(1+ke) − D1 = 50 × 1.10 − 2 = 55 − 2 = 53. Option ₹55 ignores the dividend, and ₹57 adds the dividend instead of subtracting it.
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