Capitalization Rate = 10%
Earning per share = Rs.50
Assumed rate of return on investment:
i) 12%
ii) 8%
iii) 10%
Show the effect of dividend policy on market price of shares applying walter’s model when dividend pay out ratio is i) 0% ii) 40% iii) 100%.
Best for ISBM Finance Solved Assignment and others
Solution:
Conclusion: when,
r > k, the company should retain the profits, i.e., when r= 12%, ke= I 0%;
r is 8%, i.e., r < k, the pay-out should be high; and
r is 10%; i.e. r = k; the dividend pay-out does not affect the price of the share.
