K Ltd. provides the following information: Net profit 50,00,000 10% Preference share capital @100 each 2,00,00,000 Number of equity share…

CA Intermediate · Financial Management and Strategic Management · PYQS · May 2026
K Ltd. provides the following information: Net profit 50,00,000 10% Preference share capital @100 each 2,00,00,000 Number of equity share outstanding 5,00,000 Rate of return on investment 25% Cost of equity 15% You are required to: (i) Calculate EPS and also calculate market price per equity share as per Walter's Model with the retention ratio of 20%. (ii) If the company aims to keep the market price of its equity share at 60 each, what retention ratio should be adopted? (iii) What would be optimum dividend payout ratio as per Gordon's Model?

Suggested Answer and Working Notes:

in lakhs Net Profit 50 Less: Preference dividend 20 Earning for equity shareholders 30 (i) Earning per share = 30,00,000/5,00,000 = 6.00 Market Price as per Walters model P = D+ r Ke (E-D) Ke P = 4.8 + 0.25 0.15 (6-4.8) 0.15 P = 45.33 (ii) Retention ratio when market price is 60 each Let, the dividend per share be D to get share price of 60 P = D+ r Ke (E-D) Ke or 60 = D+ 0.25 0.15 (6-D) 0.15 or 9 = 0.15D+1.5-0.25D or 1.35 = 0.15D+1.5-0.25D or 0.10D = 0.15 D = 1.50 Retention ratio = 4.5/6 = 0.75 = 75% (iii) As per Gordon's model, when r > Ke, optimum dividend payout ratio is 'Zero'.

Topics: Part-A: Financial Management

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