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200 Corporate Finance BRILLIANT’S

Illustration 3.1.5
From the following information, calculate the value of an equity share by Dividend Yield
Method:
{ZåZ{b{IV gyMZm go {S>{dS>|S> ¶rëS> {d{Y Ûmam EH$ B{³dQ>r eo¶a Ho$ ‘yë¶ H$s JUZm H$s{OE…
(i) The paid-up share capital of a company consists of 1,000, 15% Preference Shares of ` 100
each and 20,000 Equity Shares of ` 10 each.
EH$ H§$nZr H$m noS>-An eo¶a H¡${nQ>b 1,000, 15% {à’$a|g eo¶g© à˶oH$ < 100 VWm 20,000 B{³dQ>r
eo¶g© < 10 à˶oH$ go {‘bH$a ~Zm h¡&
(ii) The average annual profits of the company, after providing for depreciation and taxation
amounted to ` 75,000. It is considered necessary to transfer ` 10,000 to General Reserve
before declaring any dividend.
H§$nZr H$m Am¡gV dm{f©H$ bm^ S>o{à{eEeZ VWm Q>¡³goeZ àXmZ H$aZo Ho$ níMmV² < 75,000 Wm& H$moB© {S>{dS>|S>
Kmo{fV H$aZo Ho$ nhbo OZab [aOd© H$mo < 10,000 ñWmZm§V[aV H$aZm Amdí¶H$ ‘mZm J¶m h¡&

(iii)The normal return expected by investors on equity shares from the type of business
carried on by the company is 12.5%.
H§$nZr Ûmam g§Mm{bV ì¶mnma Ho$ àH$ma go B{³dQ>r eo¶g© na B§doñQ>g© Ûmam Ano{jV gm‘mݶ [aQ>Z© 12.5% h¡&

Solution:
Calculation of expected Rate of Dividend
Particulars `

Profit after tax 75,000
Less: Transferred to General Reserve 10,000
65,000
Less: Preference dividend @ 15% on ` 1,00,000 15,000
Profits available to Equity Shareholders 50,000

Dividend Yield Method of Valuation:
Value per Share
ExpectedRateof Dividend*
 × Paid-up Value
NormalRateof Return

25%
  10 = ` 20
12.5%
* Expected Rate of Dividend
Profit available for Dividend 50,000
  100   100  25%
Total paid up Equity Share Capital 2,00,000