CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Using Walter's model, Kiran Ltd has EPS of Rs 10, internal rate of return r = 15% and cost of equity ke = 10%. The dividend payout is 40%, so DPS is Rs 4. What is the market price per share?
Market price is Rs 130 under Walter's model. Dividend of Rs 4 plus retained earnings of Rs 6 multiplied by r/ke of 1.5 gives Rs 13, and dividing by the cost of equity of 10% gives Rs 130. Because r exceeds ke, retention raises value.
- ARs 100
- BRs 130Correct
- CRs 115
- DRs 160
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. Rs 100 results from ignoring the retention benefit (4/0.10 = 40 is not it, but 10/0.10 = 100 ignores r > ke). Rs 160 wrongly adds the full 1.5 x 10 = 15 plus 1 error.
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