Perfact Ltd. has 8 lakhs equity shares outstanding at the beginning of the year. The current market price per share is 120. The Board of Directors…

(a) Modigliani and Miller (M-M) – Dividend Irrelevancy Model: P 0 = (P 1 + D 1 ) / (1+K e ) Where, P 0 = Existing market price per share i.e.120 P 1 = Market price of share at the year-end (to be determined) D 1 = Contemplated dividend per share i.e.6.4 K e = Capitalisation rate i.e. 9.6% (i) (a) Calculation of share price when dividend is declared: 120 = (P 1 + 6.4) / (1+0.096) 120 x 1.096 = P 1 + 6.4 P 1 = 120 × 1.096 – 6.4 = 125.12 (b) Calculation of share price when dividend is not declared: 120 = (P 1 + 0) / (1+0.096) 120 × 1.096 = P 1 + 0 P 1 = 131.52 (ii) Calculation of No. of shares to be issued: Particulars If dividend declared If dividend not declared Net Income 160 160 Less: Dividend paid 51.20 --- Retained earnings 108.80 160 Investment budget 320 320 Amount to be raised by issue of new shares (i) 211.20 160 Market price per share (ii) 125.12 131.52 No. of new shares to be issued (i)/(ii) 1,68,797.95 1,21,654.50 Or say 1,68,798 1,21,655