Raj Limited had 50,000 equity shares of ₹10 each outstanding on January 1st. The shares are currently being quoted at par in the market. The company now intends to pay a dividend of ₹2 per share for the current calendar

Using Modigliani-Miller (MM) Model: (a) Price of the share, when dividends are paid: $P_0 = (D_1 + P_1) / (1 + k_e)$ ₹10 = (₹2 + $P_1$) / 1.15 ₹11.5 = ₹2 + $P_1$ $P_1 = \textbf{₹9.5}$ (b) Price of the share, when dividends are not paid: $P_0 = (D_1 + P_1) / (1 + k_e)$ ₹10 = (₹0 + $P_1$) / 1.15 $P_1 = \textbf{₹11.5}$ (c) Number of new equity shares to be issued: Investment needs = ₹2,00,000 Net Income = ₹1,10,000 Total Dividend paid = 50,000 shares * ₹2/share = ₹1,00,000 Retained Earnings = Net Income - Total Dividend paid = ₹1,10,000 - ₹1,00,000 = ₹10,000 Funds to be raised from new shares = Investment needs - Retained Earnings = ₹2,00,000 - ₹10,000 = ₹1,90,000 Price per share at the end of the year (when dividend is paid) = ₹9.5 (from part a) Number of new equity shares = Funds to be raised / Price per share = ₹1,90,000 / ₹9.5 = 20,000 shares