Q51009 With the help of following figures calculate the market price of a share of a company by using:

Walter’s formula

Dividend growth model (Gordon’s formula)

Earning per share (EPS)                                  ₹ 10

Dividend per share (DPS)                                ₹ 6

Cost of capital (k)                                           20%

Internal rate of return on investment          25%

Retention Ratio                                              60%

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Solution:

Market price per share by

(i)          Walter’s formula:

Gordon’s formula (Dividend Growth model): When the growth is incorporated in earnings and dividend, the present value of market price per share (P_o) is determined as follows

Gordon’s theory:

Where,

P_{o =} Present market price per share.

E = Earning per share

b = Retention ratio (i.e. % of earnings retained)

r = Internal rate of return (IRR)