The following information is taken from Gamma Ltd. Net Profit for the year 30,00,000 12% Preference share capital - 1,00,00,000Equity share capital…

Market price per share by- (1) Gordon's Model: Present market price per share (P0) = D0(1+g) / (Ke-g) OR Present market price per share (P0) = D1 / (Ke-g) Where, P0 = Present market price per share. g = Growth rate (br) = 0.75 X 0.22 = 0.165 b = Retention ratio (i.e., % of earnings retained) r = Internal rate of return (IRR) Workings: 1. Calculation of Earnings per share Particulars Amount (₹) Net Profit for the year 30,00,000 Less: Preference dividend (12% of 1,00,00,000) (12,00,000) Earnings for equity shareholders 18,00,000 No. of equity shares (₹ 60,00,000 /10) 6,00,000 Therefore, Earnings per share (Earning for equity shareholders / No. of equity shares) 18,00,000 / 6,00,000 = 3.00 2. Calculation of Dividend per share (D0) Particulars Earnings per share 3 Retention Ratio (b) 75% Dividend pay-out ratio (1-b) 25% Dividend per share (Earnings per share x Dividend pay-out ratio) 3 x 0.25 = 0.75 P0 = (0.75 * (1+0.165)) / (0.18-0.165) P0 = 0.874 / 0.015 = 58.27 approx. (2) Walter's Model: P = D + (r/Ke)(E-D) / Ke P = 0.75 + (0.22/0.18)(3-0.75) / 0.18 P = 0.75 + (1.222)(2.25) / 0.18 P = 0.75 + 2.7495 / 0.18 P = 0.75 + 15.275 P = 16.025 (The solution provided 19.44. Let's re-check the formula and calculation. P = (D + (r/Ke)*(E-D)) / Ke. D=0.75, r=0.22, Ke=0.18, E=3. P = (0.75 + (0.22/0.18)*(3-0.75)) / 0.18 = (0.75 + 1.2222 * 2.25) / 0.18 = (0.75 + 2.74995) / 0.18 = 3.49995 / 0.18 = 19.444. So 19.44 is correct.)