(a) X Y Ltd. has a paid-up share capital of ₹1,00,00,000, face value of ₹100 each. The current market price of the shares is ₹100 each. The Board of…

CA Intermediate · Financial Management and Strategic Management · MTP · September 2026
(a) X Y Ltd. has a paid-up share capital of ₹1,00,00,000, face value of ₹100 each. The current market price of the shares is ₹100 each. The Board of Directors of the company has an agenda of meeting to pay a dividend of 50% to its shareholders. The company expects a net income of ₹75,00,000 at the end of the current financial year. Company also plans for a capital expenditure for the next financial year for a cost of ₹95,00,000, which can be financed through retained earnings and issue of new equity shares. Company's desired rate of investment is 15%. Required: Following the Modigliani- Miller (MM) Hypothesis, DETERMINE value of the company when: (i) It does not pay dividend and (ii) It does pay dividend

Suggested Answer and Working Notes:

3. (a) As per MM Hypothesis, value of firm/ company is calculated as below: V f or nP o = (n + Δη)P₁ - I + E (1+K e ) Where, V f = Value of firm in the beginning of the period n = number of shares in the beginning of the period Δn = number of shares issued to raise the funds required I = Amount required for investment E = total earnings during the period (i) Value of the ZX Ltd. when dividends are not paid. nP o = (η + Δη)P₁ - I + E 1+K e nP o = (1,00,000+ 20,00,000 ) ×115-95,00,000 +75,00,000 115 (1+0.15) = ₹1,35,00,000-₹95,00,000 + ₹75,00,000 = ₹1,00,00,000 (1+0.15) Working notes: 1. Price of share at the end of the period (P 1 ) P o = P₁ + D₁ 1+K e 100 = P₁ + 0 or, P 1 = 115 1+0.15 2. Calculation of funds required for investment Earnings ₹75,00,000 Dividend distributed Nil Fund available for investment ₹75,00,000 Total Investment ₹95,00,000 Balance Funds required ₹20,00,000 3. Calculation of no. of shares required to be issued for balance fund No. of shares (Δn) = Funds required = 20,00,000 shares Price at end (P₁) 115 (ii) Value of the ZX Ltd. when dividends are paid. nP o = (η + Δη)P₁ - I + E 1+K e nP o = (1,00,000+ 70,00,000 ) ×₹65-95,00,000+ ₹75,00,000 65 (1+0.15) = ₹1,35,00,000-₹95,00,000 + ₹75,00,000 = ₹1,00,00,000 (1+0.15) Working notes: 4. Price of share at the end of the period (P 1 ) P o = P₁ + D₁ 1+K e 100 = P₁ + 50 or, P 1 = ₹65 1+0.15 5. Calculation of funds required for investment Earnings ₹75,00,000 Dividend distributed ₹50,00,000 Fund available for investment ₹25,00,000 Total Investment ₹95,00,000 Balance Funds required ₹70,00,000 6. Calculation of no. of shares required to be issued for balance fund No. of shares (Δn) = Funds required = 70,00,000 = 1,07,693 shares Price at end (P₁) 65 (approx.) Note- As per MM-hypothesis of dividend irrelevance, value of firm remains same irrespective of dividend paid. In the solution, there may be variation in value, which is due to rounding off error.

Topics: Part-A: Financial Management

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