Saraswati Ltd. has started its business a year back with a paid-up equity capital of 50,00,000. The other details are as under: Earnings of company…

CA Intermediate · Financial Management and Strategic Management · PYQS · September 2025
Saraswati Ltd. has started its business a year back with a paid-up equity capital of 50,00,000. The other details are as under: Earnings of company 5,00,000 Cost of Capital 159.09 Market price per share using Gordon's Model 8% Internal rate of return on investment 12% Number of shares 50,000 You are required to: (i) Calculate the Dividend paid per share using Gordon's Model. (ii) What will be Optimum dividend pay-out ratio according to Gordon's Model when r = K e ?

Suggested Answer and Working Notes:

(i) P 0 = E(1-b) / (K e -br) 159.09 = 10(1-b) / (0.08-0.12b) 159.09(0.08-0.12b) = 10(1-b) 12.7272 - 19.0908b = 10 - 10b 2.7272 = 9.0908b b (retained earning ratio) = 0.30 Dividend payout ratio = (1-b) = 0.70 Dividend per share = EPS x (1-b) = (5,00,000 / 50,000) x 0.70 = 10 x 0.70 = 7 (ii) When r = K e , There is no optimum ratio

Topics: Part-A: Financial Management

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