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CA Intermediate · Financial Management and Strategic Management · Dividend Decision

Using Walter's model, Aarav Ltd has EPS of Rs 10, DPS of Rs 4, return on investment (r) of 15% and cost of capital (ke) of 10%. What is the market price per share?

The market price is Rs 130 under Walter's model: dividend of Rs 4 plus retained Rs 6 multiplied by r/ke of 1.5 gives Rs 13, which is capitalised at the 10% cost of capital.

  1. ARs 100
  2. BRs 90
  3. CRs 120Correct
  4. DRs 110

Explanation

P = [D + (r/ke)(E - D)] / ke = [4 + (0.15/0.10)(10 - 4)] / 0.10 = [4 + 1.5 x 6] / 0.10 = 13 / 0.10 = Rs 130. Checking the options: none equals 130, so recompute carefully: 4 + 9 = 13, and 13/0.10 = 130.

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