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BRILLIANT’S Dividend Decision 245

Assumed rate of return on investment / B§doñQ>‘|Q> na [aQ>Z© H$s EÁ¶yåS> aoQ> (r)
(i) 15%, (ii) 10%, (iii) 8%
Solution:
DIVIDEND POLICY AND VALUE OF SHARE
(WALTER'S MODEL)
Given:

Growth firm, r > K Normal firm, r = K Declining firm, r < K
r = .15 r = .10 r = 0.8
K = .10 K = .10 K = .10
EPS = ` 10 EPS = ` 10 EPS = ` 10

(a) Payout Ratio = 0%
DPS = ` 0 DPS = ` 0 DPS = ` 0


0  .15/.10  10 0 NPP 0  .10/.10  10 0  0   .08/.10 
 10 0
P  P  P 
.10 .10 .10
= ` 150 = ` 100 = ` 80
(b) Payout Ratio = 40%

DPS = ` 4 DPS = ` 4 DPS = ` 4

4   .15/.10  4  .10/.10  10 4  4  .08/.10  10 4 
 10 4
P  P  P  .10
.10 .10
= ` 130 = ` 100 = ` 88
(c) Payout Ratio = 80%

DPS = ` 8 DPS = ` 8 DPS = ` 8
8 .15/.10  10 8  8 .10/.10  10 8  8   .08/.10 
 10 8
P  P  P 
.10 .10 .10
= ` 110 = ` 100 = ` 96

(d) Payout Ratio = 100%

DPS = ` 10 DPS = ` 10 DPS = ` 10
10   .15/.10  .10 10  10   .10/.10  10 10  10   .08/.10  10 10 
P  P  P 
.10 .10 .10
= ` 100 = ` 100 = ` 100