Page 214 - DMGT409Basic Financial Management

Unit 13: Theory and Forms of Dividend

13.6 Review Questions Notes

1. ‘Stock dividends are unfair to those stockholders who desire cash income’, comment.

2. What is stock dividend? Discuss the advantages of stock dividend to the company.
3. The earnings per share of a company is ` 8 and the rate of capitalisation applicable is 10%.
The company has before it an option of adopting (i) 5 0 % , (ii) 75%and (iii) 100% dividend
payout ratio. Compute the market price of the company’s quoted shares as per Walter’s
model if it can earn a return of (i) 15%, (ii) 10% and (iii) 5% on its retained earnings

4. Illustrate the Walter Model with a suitable example.
5. State the irrelevant theories of dividend.
6. ABC Ltd. has a capital of `10 lakhs in equity shares of `100 each. The shares currently
quoted at par. The company proposes declaration of a dividend of `10 per share at the end

of the current financial year. The capitalisation rate for the risk class to which the company
belongs is 12%.
What will be the market price of the share at the end of the year, if

(a) A dividend is not declared?
(b) A dividend is declared?
(c) Assuming that the company pays the dividend and has net profi ts of `5,00,000 and
makes new investments of `10 lakhs during the period, how many new shares must
be issued?
Use the M.M. model.

7. Illustrate that dividend policy is irrelevant.
8. Agile Ltd. belongs to a risk class of which the appropriate capitalisation 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:
(a) What will be the price of the shares at the end of the year if a diviend is not
declared?

(b) What will be the price if dividend is declared?

(c) Assuming that the firm pays dividend, has net income of ` 10 lakh and new
investments of ` 20 lakhs during the period, how many new shares must be issued?
Answers: Self Assessment

1. dividend payout ratio 2. growth opportunities

3. irrelevant 4. Bond dividends
5. Stock dividend 6. Cash
7. Paid up capital 8. False

9. False 10. True

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