DISCUSSION QUESTIONS

What is dividend? Explain the types of dividend.

Explain the approaches of dividend decision.

Explain the factors affecting the dividend policy.

Discuss the various types of dividend policy.

Explain the irrelevance and relevance dividend theories.

State the criticism of MM approach.

What are the assumptions of Walter’s model?

What are the assumptions and criticisms of Gordon’s model?

U Ltd. belongs to risk class of capitalization rate which is 14%. It has currently 3000 shares outstanding at Rs. 50 each; during the year Rs. 5 is declared as dividend. The net income of the company is Rs. 83,000. For the new project investment is required of Rs. 1,20,000. Calculate under MM hypothesis that the payment of dividend does not affect the value of the firm. (Ans. dividend paid Rs. 52 number of equity shares 1000 and value of the firm Rs. 1,50,000. Dividend not paid Rs. 57. Number of equity shares 37000/57 shares (approx. 650 shares) Value of the firm is Rs. 1,50,000)

X Ltd., had 25,000 equity shares of Rs. 100 each outstanding on 1st April, the shares are issued at par in the market, the company removed restraint in the dividend policy, the company ready to pay dividend of Rs. 15 per share for the current calendar year. The capitalization rate is 15%. Using MM approach assuming that no taxes, calculate the price of the shares at the end of the year:

  • (a) When dividend is not declared.
  • (b) When dividend is declared.
  • (c) Find out the number of new shares that the company issues to meet its investment needs of Rs 15,00,000 assuming that net income of Rs. 7,50,000 and assuming that the dividend is paid.

The following information is available in respect of a companys capitalization rate is 15% earnings per share Rs. 75. Assured rate on investment is 14% , 12%, 10%. The effect of dividend policy on market price of shares applying Walter’s model the dividend payout ratio is (a) 0% (b) 40% (c) 60% (d) 100%)

The following data are available for R Ltd.

  • — Earnings per share Rs. 8
  • — Rate of return on investment 16%
  • — Rate of return to shareholders 12%

If Gordon’s basic valuation formula is applied what will be the price per share when the dividend pay out ratio is 25%, 50%, 60% and 100%