The value of the company can be maximized if the shareholders' wealth is maximized. The par value of equity share of COMOS Limited is ₹100 per share. The company's earning per share is ₹10. The return on retained earning

Answer 6(d) Calculation of Market price of share by using the Walters' Model: Po = [D + r(E-D)/Ke] / Ke Where: Po = Market price of the Equity Share D = Dividend per Share (DPS) E = Earnings per Share (EPS) = ₹10 r = Internal Rate of Return / Return on Investment = 15% Ke = Cost of equity/Capitalization rate = 10% (i) Pay-out ratio of 20% D = 20% of ₹10 = ₹2 Po = [2 + 0.15(10-2)/0.10] / 0.10 = [2 + 0.15 * 8 / 0.10] / 0.10 = [2 + 1.2 / 0.10] / 0.10 = [2 + 12] / 0.10 = 14 / 0.10 = ₹140 (ii) Pay-out ratio of 40% D = 40% of ₹10 = ₹4 Po = [4 + 0.15(10-4)/0.10] / 0.10 = [4 + 0.15 * 6 / 0.10] / 0.10 = [4 + 0.9 / 0.10] / 0.10 = [4 + 9] / 0.10 = 13 / 0.10 = ₹130 (iii) Pay-out ratio of 60% D = 60% of ₹10 = ₹6 Po = [6 + 0.15(10-6)/0.10] / 0.10 = [6 + 0.15 * 4 / 0.10] / 0.10 = [6 + 0.6 / 0.10] / 0.10 = [6 + 6] / 0.10 = 12 / 0.10 = ₹120 (iv) Pay-out ratio of 0% (Retention of earning 100%) D = 0% of ₹10 = ₹0 Po = [0 + 0.15(10-0)/0.10] / 0.10 = [0 + 0.15 * 10 / 0.10] / 0.10 = [0 + 1.5 / 0.10] / 0.10 = [0 + 15] / 0.10 = 15 / 0.10 = ₹150 Comments: Alternative (iv) is the best because it maximizes the value of equity shares (₹150).