Given the following information about Sunrise industries Ltd.

Show
the effect of the dividend policy on the market price per share, using
1 walters model.
EPS= Rs.8
Cost of capital (K) = 12%
Assumed rate of return
a) 15%
b) 10%
c) 12%

Solution
:
To show the effect of different dividend policies on the shareholders
of the firm for 15% and 12%, let us consider 0%, 25%, 50%, 75% and
100% payout ratios.
I when R>K (15>12)
At 0% payout ratio
(dividend=0)
P= D+r/k (E-D)
K

= 0+0.15/1.12(8-0)
0.12
= Rs. 83.33
At 25% payout ratio.
P= 2+ 0.15/0.12(8-2)
0.2
= Rs. 79.16
At 50% payout ratio
P= 4+ 0.15/0.12(8-4)
0.12
= Rs. 75.
At 75% payout ratio
P= 6+ 0.15/0.12(8-6)
0.12
= Rs. 70.83
At 100% payout ratio
P= 8+0.15/0.12(8-8)
0.12

= 66.67
Therefore when R>K price share will be
maximum at 0% payout ratio. Price per share
decreases as and when payout ratio is increased.
II when R<K (10%<12%)
At 0% payout ratio
P = 0+0.10/0.12(8-0)
0.12
= Rs. 55.55
At 25% payout ratio
P = 2+0.10/0.12(8-2)
0.12
= Rs. 58.33
At 50% payout ratio
P = 4+0.10/0.12(8-4)
0.12
= Rs. 61.11
At 75% payout ratio
P = 6+0.10/0.12(8-6)
0.12
= Rs. 63.88
At 100% payout ratio
P = 8+0.10/0.12(8-8)
0.12
=
Rs. 66.66when R<K, price per will be
Therefore
maximum at 100% payout ratio. Price per share
increases as and when the payout ratio is
increased.
III when R=K (12%=12%)
At 0% payout ratio
P = 0+0.12/0.12(8-0)
0.12
= Rs. 66.66
At 25% payout ratio
P = 2+0.12/0.12(8-2)
0.12
= Rs. 66.66
At 50% payout ratio
P = 4+0.12/0.12(8-4)
0.12
= Rs. 66.66

At 75% payout ratio

P = 6+0.12/0.12(8-6)
0.12
= Rs. 66.66
At 100% payout ratio
P = 8+0.12/0.12(8-8)
0.12
= Rs. 66.66
Therefore when R=K, price per share remains the same at
all payout ratios. So there is no one-payout ratio, which is
optimum