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Excel Applications in Dividend Decision

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31 views

Excel Applications in Dividend Decision

Uploaded by

sumit.229019
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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P/E Ratio 10

No. of Outstanding shares 50,000


Price per share ₹ 100.00
Expected Net Income ₹ 500,000.00
New Investment ₹ 1,000,000.00 New Investment ₹ 1,000,000.00
Dividend intended to be paid ₹ 8.00

Ke = 1 0.1 10%
P/E Ratio

i) Price of the share at the end of the year if P1=P0*(1+ke)-D1


a) dividend is not declared

110

b) dividend is declared

102

ii) Amount to be raised through issue of new equity shares when dividend is paid: P/E Ratio
No. of Outstanding
= (I-(E-(n*D1))) Price per share
900000 Expected Net Inco
Number of new shares to be issued: New Investment
8823.53 Dividend intended to be paid
Ke = 1
ii) Amount to be raised through issue of new equity shares when dividend is not paid: P/E Ratio

= (I-(E-(n*D1)))
500000

Number of new shares to be issued:


4545.4545455

iii) Value of Firm:


a) when dividend is declared:
rP0 = 1/(1+ke) * (( n+m )*P1 -I +E)
5000000

b) when no dividend is declared


rP0 = 1/(1+ke) * (( n+m )*P1 -I +E)
5000000

Therefore, Value of firm remains unaffected irrespective of the fact whether company pays dividend or not
10
50,000
₹ 100.00
₹ 500,000.00
₹ 1,000,000.00
₹ 8.00
#DIV/0! 10%
Following are the details regarding 3 companies

A Ltd B Ltd C Ltd


IRR (r) 15% 10% 8%
Cost of Capital (Ke) 10% 10% 10%
Earning Per share ₹ 10.00 ₹ 10.00 ₹ 10.00

Using Walter model, calculate the effect of dividend payment on the value of share of the above companies under:

i) When no dividend is paid


ii) When dividend is paid @8Rs per share
ii) When dividend is paid @10Rs per share

Market price of the share as per Walter Model:

((D + ( r /Ke)*(E-D))/Ke)

A Ltd. B Ltd C Ltd

D/P Ratio P = ₹ 150.00 ₹ 100.00 ₹ 80.00


0%
0 150 100 80

80% P = ₹ 110.00 ₹ 100.00 ₹ 96.00


8
110 100 96

100% P = ₹ 100.00 ₹ 100.00 ₹ 100.00


10
100 100 100
B' Ltd. is a
normal C' Ltd. is a
firm. The "declining
A' Ltd. is a "growth price of company".
company". The price of the share The price
share is maximum with is increases
zero payout ratio unaffecte with the
d by the increase in
divident payout
decision. ratio
Assuming that the rate of return expected by investors is 11%, internal rate of return is 12% and
earning per share is 15. Calculate price per share by Gordon Model if C/P ratio is 10% and 30%
Calculation of price per share by "Gordon model" if dividend payout ratio is 10% and 30%:

Scenario 1 Scenario 2
EPS 15 15 Payout Ratio 10% 30%
Ke 11% 11%
r 12% 12%

b 90% 70%
br 10.8% 8.4%

Price per share as per Gordon Model: P= (E*(1-b))/(Ke-br)

P= 750.00 173.08
The following information for the current year about XYZ Ltd. is available to you :

Earnings of the Firm ₹ 1,800,000.00


No. of Equity Share (N) ₹ 300,000.00
Amount of Dividend Paid ₹ 900,000.00
ROI 22.50%
Cost of Equity 15%

i) Price of share and value of firm using Walter model

EPS 6 6 DPS 3

Market price of the share as per Walter Model: D + ( r /Ke)(E-D)


Ke
Po 50

Value of the firm P0 X N ₹ 15,000,000

ii) Optimum payout ratio in case of Walter model should be 0. D + ( r /Ke)(E-D)


Market price of the share at 0 payout: Ke
60

Value of firm at 0 P0 X N
₹ 18,000,000.00

iii) Value of firm will be lowest at 100% dividend payout ratio


iv) Payout ratio if firm's share price is 55 D + ( r /Ke)(E-D) = RS 55
Ke
(D+(C6/C7)(D11-D))/C7 = RS 55

1.5
v) Firm will be indifferent when payout ratio and cost of capital are equal
3
EPS ₹ 10
P-E Ratio 10
Ke 10%
No. of Outstanding shares 20,000
Expected Dividend ₹ 5
Expected Net Income ₹ 200,000
New Investment ₹ 400,000

As per MM Approach, show that the payment of dividend does not affect the value of the firm. Use the above data to prove the statement.

Solution
Situation 1 When dividend is paid:

a) Market Price: P0 = D1 + P 1 5+P1 = P0 However, P0 = EPS+P/E Ratio


1+Ke 1+0.10 = 100

P1 105 P1 = ₹ 105

b) Amount to be raised through issue of new equity shares

Amount to be raised by = I-[E-rD1]


₹ 300,000

c) Number of new shares to be issued ₹ 2,857.14

d) Value of firm: rP0 = 1 X [( r+s )P1 -I +E]


1+Ke

rP0 = ₹ 2,000,000.00
Situation 2: When Dividend is not paid

a) Market Price: P0 = D1 + P 1 0+P1 = P0 and P0 is 100


1+Ke 1+0.10

Therefore, P1 110

b) Amount to be raised by issue of new equity shares:


= I-[E-rD1]
₹ 200,000.00

c) Number of new shares: ₹ 1,818.18

d) value of Firm: rP0 = 1 X [( r+s )P1 -I +E]


1+Ke

₹ 2,000,000.00

Therefore, the value of firm remians the same


ta to prove the statement.

EPS+P/E Ratio

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