Question

X company currently has outstanding 1,00,000 shares selling at rs 100 each .the firm is thinking of declaring a dividend rs 5 per shareat the end of the current year. The capitalization of this type of firm is 10%. What will be the price of the share at the end of the year if dividend is declared.

Answer 1

$P_0 =\frac{(D_1 + P_1)} {1+ K_0}$

$P_1 = P_0 (1+K_0)-D_1$

$P_0=$ Current market price of the share $=rs 1000$

$D_1=$ Expected dividend at the end of year one $=rs 5$

$K_0=$ Cost of capital/equity$= 10\%$

$P_1=$ Expected price of the share at the end of the year$=?$

$P_1= 100(1+0.10)-5$

$=110-5$

$=rs 105$

Therefore, if the dividend is declared the price of the share at the end of the year will be rs 105