For the year ending 31.03.2025, ABC Industries Ltd declared 40% dividend. The current market price of the share is quoted at 57.50. If the retention…

1. Price under Walter's Model (P) = D + r/K e (E-D) / K e Situation 1 Situation 2 1. DP Ratio 40% 60% 2. Retention Ratio 60% 60% - 20% = 40% 3. Dividend per share = D 4 6 4. Retention per share = (E-D) 6 4 5. Market price per share = MPS 57.50 57.50 - 2.50 = 55 6. Equation = Let r/k e be y & K e be x. 4 + 6y = 57.50x 6 + 4y = 55 x 7. Equation for solving 57.50x - 6y = 4 55 x – 4y = 6 Equation 1 * 4 = 230 x - 24y = 16 .......(1) Equation 2 * 6 = 330 x - 24y = 36 .......(2) By solving, we get x = 20% and y = 1.25. y = r/K e = 1.25 r / 20% = 1.25 Hence, r = 25% 2. Comment on the dividend policy adopted by the company. Since r 25% > k e 20%, the company should retain 100%. Since the company pays 40% Dividend, the company is not following optimum dividend policy. 3. Limiting value of shares using Walter's model. Situation 1 Situation 2 1. DP Ratio 0% 100% 2. Retention Ratio 100% 0% 3. Dividend per share = D 0 10 4. Retention per share = (E-D) 10 0 P = 0 + 25%/20% (10-0) / 20% = 62.50 P = 10 + 25%/20% (0-10) / 20% = 50 4. Intrinsic value of the shares under Gordon's Model. P o = D o (1+g) / K e -g Situation 1 Situation 2 1. Dividend paid 4 6 2. Retention Ratio (b) 60% 40% 3. Return on investment (r) 25% 25% 4. Growth = g = br 15% 10% 5. Market price per share MPS 4(1+0.15) / 0.2-0.15 = 92 6(1+0.10) / 0.2-0.1 = 66 5. Mr. X, the chief financial officer of the company, opines that the return on investment of the company is not having direct / indirect effect on the intrinsic value of the shares under Gordon's Model. Only cost of equity will be considered for the computation of the intrinsic value of the shares under Gordon's Model. Since, return on investment is used for computing growth rate, both cost of equity and return on investment are considered for computing price under Gordons model. Hence, the opinion of the chief financial officer is not valid.