MCO Ltd. has a paid-up share capital of 10,00,000, face value of 10 each. The current market price of the shares is 20 each. The Board of Directors…

As per MM Hypothesis, value of firm/ company is calculated as below: V f or nP 0 = (n + Δn)P 1 - I + E / (1+K e ) Where, V f = Value of firm in the beginning of the period n = number of shares in the beginning of the period Δn = number of shares issued to raise the funds required I = Amount required for investment E = total earnings during the period (i) Value of the ZX Ltd. when dividends are not paid. nP 0 = (n + Δn)P 1 - I + E / 1+K e nP 0 = [1,00,000 + (2,30,000 / 23) × 23 -7,50,000 +5,20,000] / (1+0.15) = [₹ 25,30,000 - 7,50,000 +5,20,000] / (1+0.15) = 20,00,000 Working notes: 1. Price of share at the end of the period (P 1 ) P 0 = P 1 + D 1 / 1+K e 20 = P 1 + 0 / 1+0.15 or, P 1 = 23 2. Calculation of funds required for investment Earnings 5,20,000 Dividend distributed Nil Fund available for investment 5,20,000 Total Investment 7,50,000 Balance Funds required 2,30,000 3. Calculation of no. of shares required to be issued for balance fund No. of shares (Δn) = Funds required / Price at end (P 1 ) = 2,30,000 / 23 = 10,000 shares (ii) Value of the ZX Ltd. when dividends are paid. nP 0 = (n + Δn)P 1 - I + E / 1+K e nP 0 = [1,00,000 + (4,80,000 / 20.5) × 20.5 -7,50,000 +5,20,000] / (1+0.15) = [₹ 25,30,000 -7,50,000 +5,20,000] / (1+0.15) = 20,00,000 Working notes: 4. Price of share at the end of the period (P 1 ) P 0 = P 1 + D 1 / 1+K e 20 = P 1 + 2.5 / 1+0.15 or, P 1 = 20.5 5. Calculation of funds required for investment Earnings 5,20,000 Dividend distributed 2,50,000 Fund available for investment 2,70,000 Total Investment 7,50,000 Balance Funds required 4,80,000 6. Calculation of no. of shares required to be issued for balance fund No. of shares (Δn) = Funds required / Price at end (P 1 ) = 4,80,000 / 20.5 = 23,415 shares (approx.) Note- As per MM-hypothesis of dividend irrelevance, value of firm remains same irrespective of dividend paid. In the solution, there may be variation in value, which is due to rounding off error.