CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Under Walter's model, Kaveri Ltd has E = Rs 20 per share, r = 12% and k = 10%. By how much does the market price at a 25% payout ratio exceed the price at a 75% payout ratio?
The price at 25% payout is Rs 230 and at 75% payout is Rs 210, so the lower payout is higher by Rs 20. Because r exceeds k, each rupee retained adds value, and shifting Rs 10 of earnings to dividends cuts price by Rs 20.
- ARs 20Correct
- BRs 10
- CRs 30
- DRs 40
Explanation
At 25% payout, D = 5: P = [5 + 1.2(15)]/0.10 = 23/0.10 = Rs 230. At 75% payout, D = 15: P = [15 + 1.2(5)]/0.10 = 21/0.10 = Rs 210. Difference = Rs 20. Each Rs 1 shifted from retention to dividend lowers the numerator by 0.2, so Rs 10 shifted lowers it by 2, giving Rs 20 after dividing by 0.10.
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