Problems on dividend policy 1. Following information is available for Avanti Corporation: EPS = Rs. r = 1!

" # = 1$" %&at will be t&e price per s&are as per t&e %alter model if t&e dividend payo't ratio ()*P+ is ,"- $,"- And .,"/. EPS = Rs. $ # = 1." Ass'ming t&at t&e 0ordon model &olds1 w&at rate of ret'rn s&o'ld be earned on investments to ens're t&at mar#et price is Rs. $, w&en dividend payo't ratio is ,"2. 3&e following data is available for 4ewton 5imited: Earnings per s&are = Rs...,, Rate of ret'rn = 1! percent Cost of capital = 1$ percent (a+ 6f %alter7s val'ation form'la &olds1 w&at will be t&e price per s&are w&en t&e dividend payo't ratio is 2, percent- , percent(b+ 6f 0ordon8s basic val'ation form'la &olds1 w&at will be t&e price per s&are w&en t&e dividend payo't is 2, percent1 , percent. 3&e stoc#s of firms A and 9 are considered to be e:'ally ris#y. 6nvestors e;pect t&e s&are of firm A < t&e firm w&ic& does not plan to pay dividend == to be wort& Rs 1,, ne;t year. From t&e s&are of firm 91 too1 investors e;pect a pay off of Rs 1,, < Rs 1, by way of dividend and Rs >, by way of s&are price a year from now. )ividends are ta;ed at /$ percent and capital gains at 1/ percent. %&at will be t&e c'rrent price of t&e s&ares of A and 91 if eac& of t&em offers an e;pected post=ta; rate of 1! percent- Ass'me t&at t&e radical position applies. $. 3&e stoc#s of firms ? and 4 are considered to be e:'ally ris#y. 6nvestors e;pect t&e s&are of firm ? < t&e firm w&ic& does not plan to pay dividend == to be wort& Rs 1!, ne;t year. From t&e s&are of firm 41 too1 investors e;pect a pay off of Rs 1!, < Rs /, by way of dividend and Rs 1., by way of s&are price a year from now. )ividends are ta;ed at /, percent and capital gains at 1, percent.

%&at will be t&e c'rrent price of t&e s&ares of ? and 41 if eac& of t&em offers an e;pected post=ta; rate of /, percent- Ass'me t&at t&e radical position applies. .. Ass'me t&at investors e;pect a payoff of Rs.2,$./ a year from now from one s&are of S'man Company: Rs. $./ by way of dividend and Rs. 2,, by way of s&are price. 6f dividend is ta;ed at 1, percent and capital appreciation is ta;ed at /, percent1 w&at will be t&e c'rrent price of S'man Company7s s&are if investors e;pect a post=ta; ret'rn of 1 percent@. Aandsome Apparels e;pects t&at its net income and capital e;pendit'res over t&e ne;t fo'r years will be as follows: Bear 1 / 2 4et 6ncome (Rs.+ ,1,,, .,1,,, /$1,,, 2 1,,, Capital E;pendit'res (Rs.+ 1/1,,, 1,1,,, .1,,, @1,,,

3&e company &as 1,1,,, o'tstanding s&ares c'rrently on w&ic& it pays a dividend of two r'pees per s&are. 3&e debt= e:'ity target of t&e firm is 1:1 Re:'ired: (a+ %&at will be t&e dividend per s&are if t&e company follows a p're resid'al policy(b+ %&at e;ternal financing is re:'ired if t&e company plans to raise dividends by 1$ percent every / years(c+ %&at will be t&e dividend per s&are and e;ternal financing re:'irement if t&e company follows a policy of a constant $, percent payo't ratio!.

Bo'ng 3'r# Associates e;pects t&at its net income and capital e;pendit'res over t&e ne;t five years will be as follows: Bear 1 / 2 4et 6ncome (Rs.+ @,1,,, ,1,,, !$1,,, 2!1,,, Capital E;pendit'res (Rs.+ /$1,,, $,1,,, 1,,, $@1,,,

1,$1,,,

1 1,,,

3&e company &as /,1,,, o'tstanding s&ares c'rrently on w&ic& it pays a dividend of two r'pees per s&are. 3&e debt= e:'ity target of t&e firm is 2:/ Re:'ired: a. %&at will be t&e dividend per s&are if t&e company follows a p're resid'al policyb. %&at e;ternal financing is re:'ired if t&e company plans to raise dividends by /, percent every 2 yearsc. %&at will be t&e dividend per s&are and e;ternal financing re:'irement if t&e company follows a policy of a constant ., percent payo't ratio>. 3&e dividend per s&are of a firm for t&e c'rrent year is Rs. . %&at will be t&e e;pected dividend per s&are of a firm for ne;t year1 if t&e e;pected EPS for t&at year is Rs./, and t&e target payo't ratio is 2," and adC'stment rate is ,..- Ass'me t&at t&e 5intner model applies. 1,. 3&e capitaliDation rate of Avon 5td is 1/". 3&e company &as o'tstanding s&ares to t&e e;tent of /$,,, s&ares selling at Rs. 1,, eac&. Anticipating a net income of Rs. 21$,1,,, for t&e c'rrent financial year AEF4 5td plans to declare a dividend of Rs. 2 per s&are. 3&e company also &as a new proCect t&e investment re:'irement for w&ic& is Rs. $1,,1,,,. S&ow t&at 'nder t&e ?? model1 t&e dividend payo't does not affect t&e val'e of t&e firm.