Answer to Question #314804 in Management for Vineet Singh

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

The British often refer to sales as turnover since the ultimate reason a business invests in assets is to turn over the asset dollar into a sales dollar. If we divide sales of $ 600,000 by $ 400,000 we get 1.5 – answer is thus b. Average assets is often used in the denominator of the ratio. This tells us for every $ 1.00 we invested into assets, we were able to turn this into $ 1.50 of sales