Downloaded from www.ashishlalaji.net
201-202, Florence Classic, Besides Unnati Vidhyalay,
Jain Derasar Road, Ashapuri Society, Akota, Vadodara-20. ph: 98258 561 55
[SFM – CA Final]
Conducted on 19 th
March 2016
[Solution is at the end with marking for self-assessment]
Time Allowed-1 hour Maximum Marks- 30
Q 1
(a) Fundamental value of a share as per Dividend Discount Model is Rs.230. Last year it paid a dividend of Rs.25 per share. Investors’ expected return is 27.5%. What is the implied growth rate of dividend?
(6 Marks)
(b) EPS for a firm is Rs.38.56 with IRR of 15% and capitalization rate of 12%. What should be the dividend payout ratio as per Walters’ Model to have fundamental value of Rs.360 per share?
(8 Marks)
Q 2
(a) A firm currently has 30,000 shares at MPS of Rs.120. It proposes to pay dividend of
Rs.12 per share at the end of the year. Capitalization rate is 15%. It is expected to have cash earnings of Rs.4,00,000 at the end of the year and shall issue additional
15,000 shares next year. What amount of investments can the firm take up next year? Use MM Dividend Model.
(8 Marks)
Pinnacle Academy
1

Downloaded from www.ashishlalaji.net
(b) Young Ltd. last paid dividend of Rs.2 per share. Its earnings and dividends are expected to grow at 8 % p.a. The beta of the company is 1.3. If risk free rate is 6 % p.a. and return on market portfolio is 10 % p.a., what is the price per share of equity share?
What will be the effect on the price per share of Young Ltd. if following changes take place together?
•
Decline in market risk premium by 2 percentage points
•
Increase in risk free rate by 2.60 percentage points
•
Increase in growth rate by 1 percentage point
(8 Marks)
(Assessed answer papers shall be returned latest by 8 th
April 2016 )
Pinnacle Academy
2

Downloaded from www.ashishlalaji.net
Solution of
Test of Dividend Policy & Models
Conducted on 19 th March 2016
Q 1
(a) Let the growth rate of dividend be “g”.
As per Dividend Discount Model –
230 = 25 [1 + g] / 0.275 – g i.e. 230 [0.275 – g] = 25 [1 + g] i.e. 63.25 – 230g = 25 + 25g i.e. 63.25 – 25 = 230g + 25g
Q 1
(b) As per Walters’ Model –
360 = D + 15 / 12 [38.56 – D] / 0.12
i.e. 360 X 0.12 = D + 1.25 [38.56 – D]
i.e. 43.2 = D + 48.2 – 1.25D
i.e. 43.2 – 48.2 = D – 1.25D
i.e. – 5 = - 0.25 D
i.e. D = 5 / 0.25 = 20 i.e. 38.25 = 255g i.e. g = 38.25 / 255 = 0.15
Thus, growth rate of dividend is 15%.
Thus, D / P ratio = 20 / 38.56 = 51.87 %
(6 Marks) (8 Marks)
Q 2
(a) As per MM Model –
120 = 12 + P
1
/ 1.15 i.e. 120 [1.15] = 12 + P
1 i.e. P
1
= 138 – 12 = Rs.126
Additional shares (
Δn) to be issued is given as 15,000.
Now,
Δn is given by –
Δn = I
– (E – nD
1
) / P
1 i.e.15,000 = I – [4,00,000 – (30,000 X 12)] i.e. 18,90,000 = I – 40,000 i.e. I = Rs.19,30,000
Thus, firm can take up investments of Rs.19,30,000 next year.
(8 Marks)
Q 2
(b) k e
= 6 +1.3 [10 – 6] = 11.20 %
As per Gordon’s Model –
P
0
= 2 + 8% / 11.20% - 8% =
Rs.67.50
Effect of future changes:
Existing market risk premium = 10 – 6 =4
Revised market risk premium = 4 – 2 = 2%
Revised risk free rate = 6 + 2.6 = 8.6%
Revised k e
= 8.6 + 1.3 [2] = 11.20 %
As per Gordon’s Model –
P
0
= 2 (1.09) / 11.20% - 9% = Rs.99.09
(8 Marks)
Solution prepared by
Pinnacle Academy
3