The following information is supplied to you: Particulars Amount (₹) Total Earnings 4,50,000 No of Equity Shares (of 100 each) 25,000 shares…

(i) As per Walter, If ROI > Ke, firm should retain everything and distribute nothing to maximize the share price. On the contrary, if ROI < Ke, firm should distribute everything and retain nothing to maximize the wealth of the equity owners. ROI = Total Earnings / Equity Share capital = 4,50,000 / 25,00,000 ROI = 18% Ke = 1 / PE P.E Ratio = MPS / EPS = 198 /18 = 11 Therefor Ke = 1/11 = 9.091% Since ROI > Ke, optimal dividend policy of the firm should be to retain everything and distribute nothing. However, the firm has retained 40% and distributed 60%, hence it is not having an optimal dividend policy as per Walter's model. (ii) When ROI = Ke, dividend policy of the company will have no effect on the value of the share as per Walter's model Therefore, in that case, Ke should be equal to 18% P.E Ratio = 1 / Ke = 1 / 0.18 P.E Ratio = 5.56 times MPS at the above P.E Ratio = 18 x 5.56 = 100.08 (iii) If P.E Ratio is 4.5, Ke = 1 / 4.5 = 22.22% Since, ROI < Ke, optimal dividend policy of the firm should be to distribute everything and retain nothing, as the value of share would be maximum at that point thereby maximizing the wealth of the shareholder