The cost of capital of a firm is 12% & its expected earning per share at the end of the year is 20. its existing payout ratio is 25%. the…

CA Intermediate · Financial Management and Strategic Management · RTP · January 2025
The cost of capital of a firm is 12% & its expected earning per share at the end of the year is 20. its existing payout ratio is 25%. the company is planning to increase its payout ratio to 50% what will be the effect of this change on the market price of equity share (MPS) of the company as per Gordon model, if the reinvestment rate of the company is 15%?
(A) It will increase by - 444.45
(B) It will decrease by - 444.45
(C) It will increase by - 222.22
(D) It will decrease by - 222.22

Suggested Answer and Working Notes:

Correct Answer: Option (B)

It will decrease by - 444.45

Topics: Part-A: Financial Management

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