CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Using Walter's model, Sarvam Ltd has EPS of ₹10, dividend per share of ₹4, return on investment of 15% and cost of capital of 10%. What is the market price per share?
The market price is ₹130. Walter's formula gives P = [4 + (0.15/0.10) × (10 − 4)] ÷ 0.10 = (4 + 9) ÷ 0.10 = ₹130, since retained earnings of ₹6 earn more than the cost of capital.
- A₹130Correct
- B₹100
- C₹110
- D₹140
Explanation
P = [D + (r/Ke)(E - D)] / Ke = [4 + (0.15/0.10)(6)] / 0.10 = (4 + 9)/0.10 = ₹130. Using (E - D) as 10 instead of 6 would give 190/... wrongly; using D only gives ₹40. Option ₹100 results from ignoring the r/Ke factor: (4+6)/0.10.
Did you get it right without looking?
One question tells you little. A timed set on Dividend Decision shows your real accuracy, how long you take and where you lose marks.
More Dividend Decision questions
- Under Walter's model of dividend policy, a firm's market price per share will be maximised by paying no dividend (full retention) when:
- Under Walter's model of dividend policy, a firm's market price per share is expected to be highest at a payout ratio of zero when the firm i…
- Meera Ltd has EPS of Rs 20, a payout ratio of 60%, cost of equity of 10% and return on investment of 10%. Using Walter's model, what is the …
- A company's board decides to pay dividends from a fixed percentage of each year's profit rather than a fixed rupee amount. Which dividend po…
- Aarav Ltd has cost of equity (ke) of 12%, return on investment (r) of 15% and earnings per share of Rs 10. Using Walter's model with a 40% p…
- Meera Auto Ltd has a current market price of ₹150 per share and expects to pay a dividend of ₹9 at the end of year 1. Dividends are expected…