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BRILLIANT’S Dividend Decision 257

I  E nD 1 
 n 
P
1
(iii) Value of the firm: (iii) ’$‘© H$s d¡ë¶y:


n + Δn P – I + E
V = 1
1 + K
e
Where,
n = no. of shares.
n = No. of additional shares to be issued.
V = present value of the firm.

Illustration 3.2.4
Vinayak Ltd. belongs to a risk class of which the appropriate capitalization rate is 10%. It
currently has 1,00,000 shares selling at ` 100 each. The firm is contemplating declaration of a
dividend of ` 6 per share at the end of the current fiscal year which has just begun. Answer the
following questions based on Modigliani and Miller Model and assumption of no taxes:
(i) What will be the price of the shares at the end of the year if a dividend is not declared?
(ii) What will be the price if dividend is declared ?
(iii) Assuming that the firm pays dividend, has net income of ` 10 lakhs and makes new
investment of ` 20 lakhs during the period, how many new shares must be issued?
{dZm¶H$ {b{‘Q>oS> [añH$ ³bmg Ho$ A§VJ©V AmVm h¡ {OgH$s Cn¶w³V H¡${nQ>bmBOoeZ aoQ> 10% h¡& BgZo dV©‘mZ ‘|
` 100 à˶oH$ ~ma 1,00,000 eo¶g© ~oMo h¢& g§ñWm A^r àma§^ hþE dV©‘mZ {dÎm df© Ho$ A§V ‘| ` 6 à{V eo¶a Ho$ {S>{dS>|S>
H$s KmofUm H$m g‘W©Z H$aVr h¡& ¶{X ‘mo{Xp½bEZr VWm {‘ba ‘m°S>b Ho$ AmYma na VWm H$moB© Q>¡³g Z ‘mZVo hþE {ZåZ{b{IV
àíZm| Ho$ CËVa Xr{OE…
(i) ¶{X EH$ {S>{dS>|S> H$s KmofUm Zht H$s J¶r h¡ Vmo df© Ho$ A§V ‘| eo¶g© H$m ‘yë¶ ³¶m hmoJm?
(ii) ¶{X {S>{dS>|S> Kmo{fV {H$¶m OmVm h¡ Vmo ‘yë¶ ³¶m hmoJm?

(iii) ‘mZm {H$ g§ñWm {S>{dS>|S> H$m ^wJVmZ H$aVr h¡ {OgH$s Hw$b Am¶ ` 10 bmI h¡ VWm Ad{Y Ho$ Xm¡amZ ` 20 bmI
H$m Z¶m {Zdoe H$aVr h¡, {H$VZo Z¶o eo¶g© Omar {H$¶o OmZo Mm{hE?
Solution:
Under MM model, the following formula is used to ascertain the market price of Equity Share:
1
P   D  P 1 
1
O
1 K
e
(i) If the dividend is not declared:
1 P 1
100 = × 0 + P 1   100 
1 + 0.10 . 1 10
 P = 100 × 1.10  P = ` 110
1 1
Price of the share at the end of the year.