The following information is given for QB Ltd. Earnings per share 180 Dividend per share 45 Cost of capital 17% Internal Rate of Return on…

(i) As per Gordon's Model, Price per share is computed using the formula: Po = \frac{E1(1-b)}{Ke-br} E1(1−b)Ke−br E 1 ( 1 − b ) K e − b r Where, Po = Price per share E1 = Earnings per share Payout ratio = 45/180 = 25% b = Retention ratio; (1 - b = Pay-out ratio) = 1-0.25 = 0.75 Ke = Cost of capital r = IRR br = Growth rate (g) Applying the above formula, price per share Po = \frac{180(1-0.75)}{0.17-0.75\times0.2} 180(1−0.75)0.17−0.75×0.2 180 ( 1 − 0.75 ) 0.17 − 0.75 × 0.2 = \frac{45}{0.02} 450.02 45 0.02 = 2,250 (ii) As per Walter's Model, Price per share is computed using the formula: Price (P) = \frac{D+\frac{r}{Ke}(E-D)}{Ke} D+rKe(E−D)Ke D + r K e ( E − D ) K e Where, P = Market Price of the share. E = Earnings per share. D = Dividend per share. Ke = Cost of equity/ rate of capitalization/ discount rate. r = Internal rate of return/ return on investment Applying the above formula, price per share P = \frac{45+\frac{0.20}{0.17}(180-45)}{0.17} 45+0.200.17(180−45)0.17 45 + 0.20 0.17 ( 180 − 45 ) 0.17 Or, P = \frac{45+158.82}{0.17} 45+158.820.17 45 + 158.82 0.17 = 1,200 (approx..)