Answer to Question #313958 in Management for Vinay

Question

The equity shares of a publicly traded company are priced at Rs. 450 with P/E (Price to Earnings) ratio of 15. The announces a dividend of Rs. 9 per shares. The shareholders of the company expect the dividend to grow at a rate of 6% every year, and the cost of equity for the company is 15%. According to the dividend relevance approach suggested by Walter and Gordon, what would be the impact of dividend announcement on the market price of the shares of the company if required rate of return for investors is (i) 12%, (ii) 15% and (iii) 18%.

Answer 1

Cash $70,000 Bank loan $50,000 Computers 30,000 Shareholders’ equity 50,000 Total $100,000 Total $100,000 Assets Liabilities & Shareholders’ Equity Ratio of real to total assets = $100,000