Following information have been provided by LP Ltd.: Profit before Tax 40 Lakh Tax Rate 30% Equity Share Capital (10) 40 Lakh Return on Investment…

CA Intermediate · Financial Management and Strategic Management · PYQS · January 2025
Following information have been provided by LP Ltd.: Profit before Tax 40 Lakh Tax Rate 30% Equity Share Capital (10) 40 Lakh Return on Investment 18% Cost of Equity 15% Dividend Payout Ratio 50% You are required: (i) to determine the price of Equity Share of the company as per Walter's Model; (ii) to determine the Dividend Pay-out Ratio by applying Walter's Model assuming the price of equity share of the company is 48.

Suggested Answer and Working Notes:

(i) Price per share as per Walter's Model (₹ in lakhs) Profit before tax 40 Less: tax @ 30% 12 Earning for equity shareholders 28 Earning per share 28/4 = 7 P = D + (E - D) r / K e / K e Where, P = Market Price of the share. E = Earnings per share. = 7 D = Dividend per share. = 3.5 K e = Cost of equity/ rate of capitalization/ discount rate. = 15% r = Internal rate of return/ return on investment = 18% Applying the above formula, price per share P = 3.5 + (7 - 3.5) 0.18 / 0.15 / 0.15 Or, P = 3.5 + 4.2 / 0.15 = 51.33 (ii) Let, the dividend per share be D to get share price of 48 P = D + (E - D) r / K e / K e 48 = D + (7 - D) 0.18 / 0.15 / 0.15 7.2 = 0.15D + 1.26 - 0.18D 0.03D = 1.26 - 1.08 D = 6 D/P ratio = DPS / EPS × 100 = 6 / 7 × 100 = 85.714%

Topics: Part-A: Financial Management

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