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Pls solve this
ABC Ltd. has 50,000 outstanding shares. The current market price per share is Rs.100 each. It hopes to make a net income of Rs.5,00,000 at the end of current year. The Company’s Board is considering a dividend of Rs.5 per share at the end of current financial year. The company needs to raise Rs.10,00,000 for an approved investment expenditure. The company belongs to a risk class for which the capitalization rate is 10%. Show, how does the M-M approach affect the value of firm if the dividends are paid or not paid.
(6 Marks) (November, 2006)
M.M. approach indicates that the value of the firm in both the situations will be the same.
Replies (4)
When dividends are paid
100 = (5 + P1)/(1 + 0.10)
Therefore, P1 = Rs.105/-.
When dividend is not paid
100 = 1/1.1 x P1
Therefore, P1 = Rs.110/-.
Dividends paid Dividends not paid
Investments 10,00,000 10,00,000
Net profit 5,00,000 5,00,000
- Dividend 2,50,000 -
2,50,000 5,00,000
7,50,000 5,00,000
Market value 105 110
No of new equity shares 7143 4545
Existing shares 50000 50000
Total shares 57143 54545
Market value of firm 57143*105 = 60,00,000 54545*110= 60,00,000
I m facing same prob.
I think in 2nd ques. value is calculated by market capitalization nd in 1st ques. value is calculated by M & M approach.
Dear both r one n the same.......
Both r just diff ways of showing MM..........
U should follow 1st one bcoz compile n module r following the same one......
I think in 2nd ques. value is calculated by market capitalization nd in 1st ques. value is calculated by M & M approach.
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