Fundamentals of Financial Management, Third Edition

NUMERICAL PROBLEMS

1. A company earns 12% against a required rate of return of 10%. The EPS is Rs 8 with a 50% dividend pay-out ratio. Find the value of its share using:
   1. Walter’s model; and
   2. Gordon’s model.
2. EPS is Rs 10. Capitalisation rate is 12.5%. IRR is 15%. Determine the pay-out ratio and the price of shares at this pay-out ratio based on Walter’s theory.
3. If a share is selling for Rs 150. the company is to declare dividend for Rs 10 per share. The capitalisation rate is 10%. Find the shareholders’ wealth in case of dividend/no dividend.
4. A company has Rs 50,000 shares. Its earnings and investment requirements are as follows:

   Year	Earnings (Rs)	Investment (Rs)
   1	50,000	60,000
   2	50,000	55,000
   3	50,000	30,000 ...