CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Using Walter's model, Sagar Textiles has EPS of Rs 20, a payout ratio of 40%, cost of equity (Ke) of 10% and return on investment (r) of 15%. What is the market price per share?
Under Walter's model, price equals dividend plus (r/Ke) times retained earnings, all divided by Ke. With dividend Rs 8, retained Rs 12, r/Ke 1.5, the numerator is 26 and the price is Rs 260.
- ARs 200
- BRs 240Correct
- CRs 220
- DRs 180
Explanation
D = 40% of 20 = Rs 8. P = [D + (r/Ke)(E - D)] / Ke = [8 + (0.15/0.10)(12)] / 0.10 = (8 + 18) / 0.10 = Rs 260. Check: 26/0.10 = 260. Hence the stated key must be recomputed: the correct value is Rs 260, which is not listed, so the key below is invalid.
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