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BRILLIANT’S Dividend Decision 247

Illustration 3.2.2
Following are the details regarding three companies X Ltd. , Y Ltd. and Z Ltd.
ZrMo VrZ H§$nZrO X {b., Y {b. VWm Z {b. go g§~§{YV {ddaU h¡&

Details ({ddaU) X Ltd. / X {b. Y Ltd. / Y {b. Z Ltd. / Z {b.

Internal rate of return / [aQ>Z© H$s B§Q>Z©b aoQ> 15% 5% 10%
Cost of equity capital / Bp³dQ>r H¡${nQ>b H$s H$m°ñQ> 10% 10% 10%
Earnings Per Share / A{Zª½g na eo¶a ` 8 ` 8 ` 8

Calculate the value of an equity share of each of these companies applying Walter's formula
when dividend payment ratio (D/P ratio) is:
dmëQ>a H$m ’$m°‘y©bm à¶w³V H$aHo$ BZ H§$nZrO ‘| go à˶oH$ Ho$ Bp³dQ>r eo¶a H$s JUZm H$s{OE O~ {S>{dS>|S> no‘|Q> aoemo
(D/P aoemo) h¡…
(i) 50% (ii) 75% (iii) 25%.
What conclusion do you draw ? / Amn ³¶m {ZîH$f© {ZH$mbVo h¢?

Solution:
Value of an Equity share according to Walter's formula :

r
DPS  EPS  DPS 
K
P  e
K e
Where, P = Market Price per share DPS = Dividend Per Share
r = Internal Rate of Return
K = Capitalization rate or cost of capital (i.e. 10% in this question).
e
EPS = Earnings Per Share (i.e ` 8 in this question)
Dividend Payment Ratio (D/P Ratio) Dividend Per Share (`)

50% 50% of 8 = 4
75% 75% of 8 = 6
25% 25% of 8 = 2
Value of an equity share of each of these companies

Particulars X Ltd. Y Ltd. Z Ltd.

4 .15/.10 8 4  4 0.5/.10 8 4  4 .10/.10 8 4 
(i) When D/P P  P  P 
.10 .10 .10
ratio is 50% = ` 100 = ` 60 = ` 80