Dividend Decisions

Gordon Model (Dividend Growth Model)

Q.1) Nitra Limited is having its shares quoted in major stock exchanges. Its share current
market price after dividend distributed at the rate of 20% per annum having a paid-up shares
capital of 10 lakhs of 10 each. Annual growth rate in dividend expected is 2%. The expected
rate of return on its equity​ ​capital is 15%.

Ans) ​Dividend distributed = 10 Lakh x 0.20

= 2 Lakh

Outstanding number of shares = 10 Lakh/Rs.10

= 1 Lakh

Using Gordon’s formula:

​D​0​ (1 + g)
Ke – g
where, D​0​ = Dividend paid in current year
g = Growth rate
Ke = Cost of equity

D​0​ = 2 Lakh
g =2%
Ke = 15%
= ​2 (1 + 0.02)
.15 – 0.02

Value per share = 15.69

Q.2) Ultra Limited is having its shares quoted in major stock exchanges. Its share current
market price after dividend distributed at the rate of 30% per annum having a paid-up shares
capital of 10 lakhs of 100 each. Annual growth rate in dividend expected is 3%. The expected
rate of return on its equity​ ​capital is 18%.

Ans) ​Dividend distributed = 10 Lakh x 0.30

 = 3 Lakh
Outstanding number of shares = 10 Lakh/Rs.100
= 10000

Using Gordon’s formula:

​D​0​ (1 + g)
Ke – g
D​0​ = 3 Lakh
g =3%
Ke = 18%
Therefore, D​1​ = ​300000 (1 + 0.03)​ = 2060000
0.18 – 0.03

Value per share = 2060000/10000

= ​206

Q.3) A Ltd has just paid out Rs. 5 as dividend. The past trend of the company indicates the
dividend growth increases to 10% for the first two years and then increases by 5% for the third
year. The company sees 20% growth rate for year 4 and year 5. After that point the annual
increase will be stable at 15%. If the expected return is 20%, ascertain the theoretical Market
Price of the share assuming the dividend outgo is the sole determinant of Market Value. (Apply
Gordon Model)

Ans)

Discount
Cash Discounted
Year Nature Factor
Flow Cash Flow
(20%)
1 Dividend 5.5 0.833 4.581
2 Dividend 6.05 0.694 4.198
3 Dividend 6.95 0.578 4.021
4 Dividend 8.34 0.481 4.011
5 Dividend 10.008 0.4 4.003
Market price at
5 230.18* 0.4 92.073
year end
112.887
*D​5
--------- = ​10.008 x 1.15 ​= 230.18
K​e​ – g 20% - 15%

1
According to Gordon, the current Market price of the share is ​Rs. 112.887

Q.4) ​XYZ Ltd has just paid out Rs. 7 as dividend. The past trend of the company indicates the
dividend growth increases to 10% for the first two years and then increases by 5% for the
third year. The company sees 20% growth rate for year 4 and year 5. After that point the
annual increase will be stable at 15%. If the expected return is 20%, ascertain the theoretical
Market Price of the share assuming the dividend outgo is the sole determinant of Market
Value.
(Apply Gordon Model)

Ans)

Discount
Cash Discounted
Year Nature Factor
Flow Cash Flow
(20%)
1 Dividend 7.7 0.833 6.414
2 Dividend 8.47 0.694 5.878
3 Dividend 9.74 0.578 5.629
4 Dividend 11.68 0.481 5.618
5 Dividend 14.01 0.4 5.604
Market price
5 322.23* 0.4 128.892
at year end
158.035

*D​5
--------- = ​14.01 x 1.15
K​e​ – g 20% - 15%

​= 322.23

According to Gordon, the current Market price of the share is ​Rs. 158.035

Q.5) ​A company is expected to pay a dividend of Rs. 5.60 next year. The amount of dividend is
likely to grow at 7% per annum for further 3 years and after that the growth rate is likely to
stabilize at 3%. If the cost of capital is 12%, calculate the current Market price of the share.

Ans) P.T.O.

2
 Discount
Cash Discounted
Year Nature Factor
Flow Cash Flow
(12%)

1 Dividend 5.6 0.892 4.995

2 Dividend 5.992 0.797 4.775
3 Dividend 6.411 0.711 4.558

4 Dividend 6.86 0.635 4.356

Market price at
4 78.50* 0.635 49.847
year end
68.531

*D​4
--------- = ​6.860 x 1.03​= 78.50
K​e​ – g 12% - 3%

According to Gordon, the current Market price of the share is ​Rs. 68.531

Q.6) ​A company is expected to pay a dividend of Rs. 8.60 next year. The amount of dividend is
likely to grow at 8% per annum for further 3 years and after that the growth rate is likely to
stabilize at 5%. If the cost of capital is 15%, calculate the current Market price of the share.

Ans)

Discount
Discounted
Year Nature Cash Flow Factor
Cash Flow
(15%)
1 Dividend 8.6 0.869 7.47
2 Dividend 9.288 0.755 7.02
3 Dividend 10.031 0.657 6.59
4 Dividend 10.833 0.571 6.18
Market price at
4 113.996* 0.571 64.8
year end
92.06

*D​4
--------- = ​10.833 x 1.05 ​= 113.996
K​e​ – g 15% - 5%
According to Gordon, the current Market price is ​Rs. 96.06

3
Q.7) ​The firm had paid dividend at Rs. 2 per share last year. The estimated growth of dividends
is 5% p a. determine the estimated market price of the equity share if the growth (1) raises
to 8% (2) falls to 3%. Also find out the present market price of the share, given that the
required rate of return of the equity investors is 15.5%.

Ans)

Year Nature Cash Flow

1 Dividend 2.1

Market price at
1 20*
year end

*D​1
--------- = ​ 2.1 ​ = 20
K​e​ – g 15.5% - 5%

According to Gordon, The current market price is ​Rs.20

(1)

Year Nature Cash Flow

1 Dividend 2.16

Market price at
1 28.8**
year end

**D​1
--------- = ​ 2.16 ​ = 28.8
K​e​ – g 15.5% - 8%

According to Gordon, when the growth rate rises to 8%, the Market price is ​Rs. 28.8

4
(2)

Year Nature Cash Flow

1 Dividend 2.06

Market price at
1 16.48***
year end

***D​1
--------- = ​ 2.06 ​ = 16.48
K​e​ – g 15.5% - 3%

According to Gordon, when the growth rate falls to 3%, the Market price is ​Rs. 16.48

Q.8) ​The firm had paid dividend at Rs. 5 per share last year. The estimated growth of dividends
from the company is estimated to be 8% p a. Determine the estimated market price of the
equity share if the estimated growth rate of dividend (1) raises to 8% (2) falls to 3%. Also
find out the present market price of the share, given that the required rate of return of the
equity investors is 18%.

Ans) ​Situation 1

g = 8%
D​1​ = 5.4

Market Price = ​ D​1

Ke – g

=​ 5.4 ​= 52​= ​Rs. 54

18% - 8%

Situation 2

g = 3%
D1 = 5.15

Market Price = ​ D​1

Ke – g

=​ 5.4 ​= 52​= ​Rs. 34.33

18% - 3%

5
Q.9) ​A Ltd furnishes the following information relevant to its dividend policies – (a) cost of
capital – 15% (b) ROI is 20% (c) retention ratio is 60%.
Ascertain the value per share under the Gordons Model if for the year ending today. A Ltd has
an EPS of (i) Rs. 30 (ii) Rs. 50 (iii) Rs. 100

Ans) ​(i) EPS = 30

g = 0.20 x 0.60
= 12%

Gordon = ​D​0​ (1 + g)
Ke – g

= ​12 (1 + 0.12)
0.15 – 0.12

= ​13.44 = ​448
0.03

(ii) EPS = 50
g = 12%

Gordon = ​D​0​ (1 + g)
Ke – g

= ​20 (1 + 0.12)
0.15 – 0.12

= ​22.4 = ​746.66
0.03

(iii) EPS = 100

g = 12%

Gordon = ​D​0​ (1 + g)
Ke – g

= ​40 (1 + 0.12)
0.15 – 0.12

= ​44.8 = ​1493.33
0.03

6
Q.10) ​B Ltd furnishes the following information relevant to its dividend policies – (a) Cost of
Capital is 15% (b) ROI is 10% (c) Retention Ratio is 60%
Ascertain the value per share under the Gordons Model if the year ending today. A Ltd has an
EPS of (a) Rs. 30 (b) Rs. 50 (c) Rs. 100

Ans) ​(i) EPS = 30

g = 0.10 x 0.60
= 6%

​ ​0​ (1 + g)
Gordon = D
Ke – g

= ​12 (1 + 0.06)
0.15 – 0.06

= ​12.72 = ​141.33
0.09

(ii) EPS = 50
g = 6%

​ ​0​ (1 + g)
Gordon = D
Ke – g

= ​20 (1 + 0.06)
0.15 – 0.06

= ​21.2 = ​235.55
0.09

(iii) EPS = 100

g = 6%

Gordon = ​D​0​ (1 + g)
Ke – g

= ​40 (1 + 0.06)
0.15 – 0.06

= ​42.4 = ​471.11
0.09

7
Walter Model
Q.11) With the help of following figures calculate the market price of a share of a company by
using:

(i) Walter’s formula

(ii) Dividend growth model (Gordon’s formula)

Earnings per share (EPS) ​10

Dividend per share (DPS) 6​
Cost of capital (k) 20%
Internal rate of return on investment 25%
Retention Ratio 40%

Ans) ​(i)​ Formula:

​CMP = ​D + (E – D) x r/Ke
Ke

where, D = Dividend declared

E = Earnings per share
r = Internal rate of return
Ke = Cost of equity

CMP​ = ​6 + (10 – 6) x ​0.25

0.20 = ​55
------------------------
0.20

(ii) g = br (b = ROI, r = retention ratio)

= 0.25 x 0.60
= 15%

Market price by Gordon = ​ D​1

Ke – g

= ​D​0​ (1 + g)
Ke – g

= ​6 (1 + 0.0.15)
8
 0.20 – 0.15

= ​6.9
0.05

= ​138

Q12​) ​The following figures are collected from the annual report of XYZ Ltd.:

`
Net Profit 30 lakhs
Outstanding 12% preference shares 100 lakhs
No. of equity shares 3 lakhs
Return on Investment 20%

What should be the approximate dividend pay-out ratio so as to keep the share price at 42 by
using Walter model?

Ans) ​When there are preference shareholders in company books:

Earnings = 30 Lakh
Less: Preference shareholders (100x12%) = ​12 Lakh
Profit available = 18 Lakh

EPS = ​18 Lakh​ = 6

3 Lakh
Let D = x
CMP = 42

42 = x + (6 – x) x ​0.20
0.16
----------------------
0.16
x = 3.12

Q.13 )​ The following figures are collected from the annual report of ABC Ltd.:

`
Net Profit 30 lakhs
Outstanding 15% preference shares 100 lakhs
No. of equity shares 3 lakhs

9
 Return on Investment 20%

What should be the approximate dividend pay-out ratio so as to keep the share price at 84 by
using Walter model?

Ans)​ ​When there are preference shareholders in company books:

Earnings = 30 Lakh
Less: Preference shareholders (100x15%) = ​15 Lakh
Profit available = 15 Lakh

EPS = ​15 Lakh​ = 5

3 Lakh
Let D = x
CMP = 84

84 = x + (5 – x) x ​0.20
0.12
----------------------
0.12
x = - 2.69

Q.14) ​A Ltd earns Rs 6 per share having a capitalization rate of 10 % and has ROI of 20 %
.According to Walter Model what should be the price per share at 30 % dividend payout Ratio?
Is the optimum payout ratio is as per Walter?

Ans)​ E = 6
r = 0.20
Dividend = 30% of E
= 1.8

CMP = 1.8 + (6 – 1.8) x ​0.20

0.10
-----------------------------
0.10
= ​102

10
 Q15 ) DEW Ltd has earned Rs 100 per share after payment of all taxes. It proposes to declare a
dividend of Rs 20 per share. The cost of Equity is 15 % .Ascertain the value per share under the
Walter s model, If the company on its investment can earn (a ) 12 % (b) 15 % ( c) 18 % and (d)
20 % .Also draw the inference from the values under the different cases

Ans) ​a) CMP = 20 + (100 – 20) x ​0.12

0.15
-----------------------------
0.15

= ​560

b) CMP = 20 + (100 – 20) x ​0.15

0.15
-----------------------------
0.15

​=​ ​666.66

c) CMP = 20 + (100 – 20) x ​0.18

0.15
-----------------------------
0.15

​=​ ​773.33

d) CMP = 20 + (100 – 20) x ​0.20

0.15
-----------------------------
0.15

​=​ ​844.44

Q.16) ABC has earned Rs. 150 per share after payment of all taxes. It proposes to declare a
dividend of Rs. 20 per share. The cost of equity is 15%. Ascertain the value per share under the
Walters model, if the company on its investment can earn (a) 12% (b) 15% (c) 18% and (d) 20%.
Also draw the inference from the values under the different cases.

Ans) ​a) CMP = 20 + (150 – 20) x ​0.12

0.15
-----------------------------
0.15
11
 = ​826.66

b) CMP = 20 + (150 – 20) x ​0.15

0.15
-----------------------------
0.15

​=​ 1000

c) CMP = 20 + (150 – 20) x ​0.18

0.15
-----------------------------
0.15
​=​ 1173.33
d) CMP = 20 + (150 – 20) x ​0.20
0.15
-----------------------------
0.15

​=​ 1288.88

Q17) CEE Ltd has PAT of Rs 200 crores and 10,00,000 shares of Rs 10 each outstanding as the
end of the financial year .Its cost of capital is 12 % .CEE can earn 15 % on its investment
.Ascertain the value of the company under Walters Model ,if the payout is (a) 20 % (b) 40 % (c)
60 % and (d) 80 % .Also draw out the inference from the values obtained under different cases

Ans) (a) Total Earnings:

= ​(200 x 20%) + [200 – 40] x 0.15/0.12
0.12

= ​2000 Cr

(b) Total Earnings = ​(200 x 40%) + [200 - 80] x 0.15/0.12

0.12

= ​1916.66

(c) Total Earnings = ​(200 x 60%) + [200 – 120] x 0.15/0.12

0.12

= ​1833.33

(d) Total Earnings = ​(200 x 80%) + [200 – 160] x 0.15/0.12

0.12

12
 = ​1750

Q.18) CEE Ltd has PAT of Rs 500 crores and 10,00,000 shares of Rs 10 each outstanding as
the end of the financial year .Its cost of capital is 12 % .CEE can earn 15 % on its investment
.Ascertain the value of the company under Walters Model ,if the payout is (a) 20 % (b) 40 % (c)
60 % and (d) 80 % .Also draw out the inference from the values obtained under different cases

Ans) ​(a) Total Earnings = ​(200 x 20%) + [200 – 40] x 0.15/0.12

0.12
= ​2000 Cr

(b) Total Earnings = ​(200 x 40%) + [200 - 80] x 0.15/0.12

0.12

= ​1916.66
(c) Total Earnings = ​(200 x 60%) + [200 – 120] x 0.15/0.12
0.12

= ​1833.33

(d) Total Earnings = ​(200 x 80%) + [200 – 160] x 0.15/0.12

0.12

= ​1750

Q.19) XYZ Company which earns 10 per share is capitalized at 10 percent and has a return on
investment of 12 percent. Determine the optimum dividend payout ratio and the price of the
share when payout using Walter’s dividend policy model

Ans) ​E = 10
Ke = 10%
r = 12%

1/P.E Ratio = Ke

Therefore, P.E = 1/0.10

= 10

P.E Ratio = CMP/EPS

Therefore, CMP = 10 x 10
= 100

Formula:

13
CMP = ​D + (E – D) x r/Ke
Ke

100 = ​D + (10 – D) x 0.12/0.10

0.10

Therefore, ​D = 10

P​0​ = 100
D = 10

Q.20) ABC Company which earns 10 per share is capitalized at 12 percent and has a return on
investment of 15 percent. Determine the optimum dividend payout ratio and the price of the
share at the payout using Walter’s dividend policy model

Ans) ​E = 10
Ke = 12%
r = 15%

1/P.E Ratio = Ke
Therefore, P.E = 1/0.12
= 8.33

P.E Ratio = CMP/EPS

Therefore, CMP = 8.33 x 10
= 83.3

Formula:
CMP = ​D + (E – D) x r/Ke
Ke

83.3 = ​D + (10 – D) x 0.15/0.12

0.12

Therefore, ​D = 10.016

***********

Modigliani & Miller (MM) Model:

14
 Q.1) PRL Ltd is engaged in promotion and sales of community spaces which is currently
quoted at 500 at the beginning of the year. It has a capital expenditure of 300 Crore at the year
end. The cost of equity is 15% and 3 Crore shares are outstanding. Ascertain the value of the
firm at the beginning of the year if the anticipated profit for the next year is 280 Crore and the
PRL declares:
(a) No dividend
(b) Rs. 12 per share as dividend
(c) Rs. 30 per share as dividend.

Ans) ​Working Note – 1

Formula used:
P​1 =
​ P​0​ (1 + Ke) – D
where, P​1​ = Price of share at year end
Ke = Cost of equity
D = Dividend outgo
Po= Price of the share at the beginning

Dividend Outgo (0) Dividend Outgo (12) Dividend Outgo (30)

P1 = 500 (1 + 15%) - P1 = 500 (1 + 15%) - P1 = 500 (1 + 15%) -

0 12 30
P1 = ​Rs. 575 P1 = ​Rs. 563 P1 = ​Rs. 545

Working Note – 2

Dividend Outgo Dividend Outgo

Particulars Dividend Outgo (30)
(Nil) (12)
Equity Earnings 280 Cr 280 Cr 280 Cr
Less: Dividend outgo /
0 36 Cr 90 Cr
Dividend declared
Retained Earnings 280 Cr 244 Cr 190 Cr

Less: Investment 300 Cr 300 Cr 300 Cr

Further equity required /
Further investment 20 Cr 56 Cr 110 Cr
required

20 Cr/Rs.575 56Cr/Rs.536 110Cr/Rs.545

No. of shares to be issued
= ​347826 = ​994671 = ​2018349

Working Note – 3

15
 Formula used:
nP​0​ = ​[n + m] P​1​ – I​1​ + X​1
1 + Ke

where, n = number of shares outstanding at the beginning of the period

m = number of shares issued at the end of the year, (at P​1​)
P​1​ = market price per share at the end of the year
I​1​ = investment at the end of the year
X​1​ = net earnings after tax for the year
Ke = cost of equity
(a) Situation 1:
Value of firm = ​[3 Cr + 347826] Rs.575 – 300 Cr + 280 Cr
1 + 15%

= ​Approx. 1500 Cr

(b) Situation 2:
Value of firm = ​[3 Cr + 994671] Rs. 563 – 300 Cr + 280 Cr
1 + 15%

​=​ Approx. 1500 Cr

(c) Situation 3:
Value of firm = ​[3 Cr + 2018349] Rs. 545 – 300 Cr + 280 Cr
1 + 15%

= ​Approx. 1500 Cr

Q.2) RST Ltd has a capital of 10 Lakh in equity shares of 100 each. The shares are currently
quoted at par. The company proposes to declare a dividend of Rs. 10 at the end of the year. The
company belongs to the risk class where cost of equity is 12%. The net profit of the company is
Rs. 5 Lakh and the new investment is made to an extent of 10 Lakh. Using MM model,
determine the value of the firm if (a) dividend is not declared at all (b) if dividend is declared at
Rs. 10 per share.

Ans) ​Working Note – 1

​ ​1 =
Formula used: P ​ P​0​ (1 + Ke) – D

Dividend Outgo (0) Dividend Outgo (10)

P1 = 100 (1 + 12%) - 0 P1 = 100 (1 + 12%) - 10

P1 = ​Rs. 112 P1 = ​Rs. 102

16
 Working Note – 2

Dividend Outgo Dividend Outgo

Particulars
(Nil) (5)
Equity Earnings 5 Lakh 5 Lakh
Less: Dividend outgo /
0 1 Lakh
Dividend declared
Retained Earnings 5 Lakh 4 Lakh

Less: Investment 10 Lakh 10 Lakh

Further equity required /

5 Lakh 6 Lakh
Further investment required

5 Lakh/Rs.112 6 Lakh/Rs.102
No. of shares to be issued
= ​4464 = ​5882

Working Note – 3

Formula used:
nP​0​ = ​[n + m] P​1​ – I​1​ + X​1
1 + Ke

(a) Situation 1:
Value of firm = ​[10000 + 4464] Rs.112 – 10 Lakh + 5 Lakh
1 + 12%

= ​999970.42 ​(Approx. 10 Lakh)

(b) Situation 2:
Value of firm = ​[10000 + 5882] Rs. 102 – 10 Lakh + 5 Lakh
1 + 12%

​=​ 999967.85 ​(Approx. 10 Lakh)

Q.3) ABC Ltd has 50,000 shares outstanding. The current market price per share is Rs. 100. It
hopes to make a net income of Rs. 5 Lakh at the end of the current year. The company’s board
is considering a dividend option of Rs. 5 per share at the end of the current year. The company
needs to raise Rs. 10 Lakh for an approved investor expenditure. The cost of equity of the
company is 10%. How does the MM approach affect the value of the firm if the dividends are
paid or not.

Ans) ​Working Note – 1

​ ​1 =
Formula used: P ​ P​0​ (1 + Ke) – D

17
 Dividend Outgo (0) Dividend Outgo (5)

P1 = 100 (1 + 10%) - 0 P1 = 100 (1 + 10%) - 5

P1 = ​Rs. 110 P1 = ​Rs. 105

Working Note – 2

Dividend Outgo Dividend Outgo

Particulars
(Nil) (5)
Equity Earnings 5 Lakh 5 Lakh
Less: Dividend outgo /
0 250000
Dividend declared
Retained Earnings 5 Lakh 250000

Less: Investment 10 Lakh 10 Lakh

Further equity required /

500000 750000
Further investment required

5 Lakh/Rs.110 750000/Rs.105
No. of shares to be issued
= ​4545.45 = ​7142.86

Working Note – 3

Formula used:
nP​0​ = ​[n + m] P​1​ – I​1​ + X​1
1 + Ke
(c) Situation 1:
Value of firm = ​[50000 + 4545.45] Rs.110 – 10 Lakh + 5 Lakh
1 + 10%

= ​4090909

(d) Situation 2:
Value of firm = ​[50000 + 7142.86] Rs. 105 – 10 Lakh + 5 Lakh
1 + 10%

​=​ 4090909

Q.4) X Ltd has 8 Lakh equity shares outstanding in the beginning of 2014. The current market
price is Rs. 120. The board of directors of the company is contemplating to declare a dividend
of Rs. 6.4 per share. The rate of equity to which the company belongs is 9.6%. Calculate the

18
 market value of the company when the dividend is declared to not declared. If the company
desires to fund an investment project for 3.2 Crore assuming the net income of 1.6 Crore.

Ans) ​Working Note – 1

​ ​1 =
Formula used: P ​ P​0​ (1 + Ke) – D

Dividend Outgo (0) Dividend Outgo (6.4)

P1 = 120 (1 + 9.6%) - 0 P1 = 120 (1 + 9.6%) – 6.4

P1 = ​Rs. 131.52 P1 = ​Rs. 125.12

Working Note – 2

Dividend Outgo Dividend Outgo

Particulars
(Nil) (6.4)
Equity Earnings 1.6 Cr 1.6 Cr
Less: Dividend outgo /
0 5120000
Dividend declared
Retained Earnings 1.6 Cr 10880000

Less: Investment 3.2 Cr 3.2 Cr

Further equity required /

1.6 Cr 21120000
Further investment required

1.6 Cr/Rs.131.52 21120000/Rs.125.

No. of shares to be issued
= ​121654.50 12 = ​168797.95

Working Note – 3

Formula used:

nP​0​ = ​[n + m] P​1​ – I​1​ + X​1

1 + Ke

(a) Situation 1:

Value of firm = ​[8 Lakh + 121654.50] Rs.131.52 – 3.2 Cr + 1.6 Cr

1 + 9.6%

= ​66802919

19
 (b) Situation 2:

Value of firm = ​[8 Lakh + 168797.95] Rs. 125.12 – 3.2 Cr + 1.6 Cr

1 + 9.6%

​=​ 66802919

Q.5) A Ltd belongs to a risk class where P/E ratio is 8.333. It currently has 1 lakh shares selling
at Rs. 100 each. The firm was planning for a dividend declaration of Rs. 6 at the end of the
year. The firm is operating in a tax free zone and has a net income of 10 Lakh with 50% tax
rate. The new investment for the year ahead is Rs. 20 Lakh. Find out the value of the firm
according to MM approach.

Ans)

Ke = 1/P.E Ratio
= ​1/8.333
= 12%

​Working Note – 1

​ ​1 ​= P​0​ (1 + Ke) – D
Formula used: P

Dividend Outgo (6)

P1 = 100 (1 + 12%) - 6
P1 = ​Rs. 106

Working Note – 2

Dividend outgo
Particulars
(6)
Equity Earnings 10 Lakh
Less: Dividend outgo /
6 Lakh
Dividend declared
Retained Earnings 4 Lakh

Less: Investment 20 Lakh

20
 Further equity required /
16 Lakh
Further investment required

16 Lakh/Rs.106
No. of shares to be issued
= ​15094.33

Working Note – 3

Formula used:

nP​0​ = ​[n + m] P​1​ – I​1​ + X​1

1 + Ke

(a) Situation 1:
Value of firm = ​[1 Lakh + 15094.33] Rs.106 – 20 Lakh + 10 Lakh
1 + 12%

= ​8214284

21