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BRILLIANT’S Dividend Decision 253
to avoid risk and therefore they prefer near h¢ Am¡a Bg{cE do â`yMa {S>{dS>oÝS> Ho$ ~OmE dV©_mZ {S>{dS>oÝS²>g
dividend to future dividends. ng§X H$aVo h¢Ÿ&
The Gordon's model is based on bird in Jm°S>©Z _m°S>c, ~S>© BZ X hoÝS> Am°½`y©__oÝQ> na AmYm[aV
the hand argument. A bird in hand is better h¡ Omo `h VH©$ XoVm h¡ {H$ ^{dî` _| Š`m CncãY hmo gH$Vm
than two in the bush, is based on the logic that
what is available at present is preferable to h¡ Ho$ ~Om` dV©_mZ _| Š`m CncãY h¡, Á`mXm ~ohVa h¡Ÿ&
what may be available in the future. Accord- Cgr àH$ma, `{X {S>{dS>oÝS> nm°{cgr H$mo A{ZpíMVVm Ho$
ingly, when dividend policy is considered in
the context of uncertainty, the appropriate g§X^© _| XoIm OmE Vmo C{MV {S>ñH$mCÝQ> aoQ> K H$mo pñWa
discount rate K cannot be assumed to be Zht _mZm Om gH$VmŸ& g§jon _|, BZdoñQ>g© A{ZpíMVVm H$mo
constant. In brief, investor would like to avoid Xya H$aZm MmhVo h¢ Ed§ `{X g^r MrO| pñWa hmo Vmo do eo`a,
uncertainty and would be willing to pay higher
price for the share that pays a higher current Omo dV©_mZ _| CÀMV_ {S>{dS>oÝS> àXmZ H$ao, Ho$ {cE CÀM
dividend if all other things remain constant. H$s_V AXm H$aZo Ho$ {cE VËna hm|JoŸ&
Illustration 3.2.3
The following information is available in respect of the rate of return on investment (r), the
capitalization rate (k ) and earnings per share (E) of XYZ Ltd.:
e
XYZ {b{‘Q>oS> Ho$ {Zdoe na [aQ>Z© aoQ> (r), H¡${nQ>bmBOoeZ aoQ> (k ) VWm A{Zª½g na eo¶a (E) Ho$ g§~§Y ‘|
e
{ZåZ{b{IV gyMZm CnbãY h¢…
r = 12 %; E = ` 20
Determine the value of its shares on the basis of Gordon’s model assuming the following:
{ZåZ{b{IV ‘mZVo hþE Jm°S>©Z Ho$ ‘m°S>b Ho$ AmYma na BgHo$ eo¶a Ho$ ‘yë¶ H$m {ZYm©aU H$s{OE…
D/P ratio (D/P aoemo) Retention ratio ([aQ>|eZ aoemo) k (%)
e
(1–b) (b)
(a) 10 90 20
(b) 20 80 19
(c) 30 70 18
(d) 40 60 17
(e) 50 50 16
(f) 60 40 15
(g) 70 30 14
Solution:
Dividend Policy and Value of Shares of Hypothetical Ltd. (Gordon’s Model)
(a) D/P ratio 10 Retention ratio = 90 ` 20 (1 0.9) ` 2
P ` 21.74
br = 0.9 × 0.12 = 0.108 0.20 0.108 0.092
(b) D/P ratio 20 Retention ratio = 80 ` 20 (1 0.8)
P ` 42.55
br = 0.8 × 0.12 = 0.096 0.19 0.096
