You are being appointed as a Management consultant by Gramin Ltd., and the following information is provided to you, by the management of Gramin Ltd. Gramin Ltd. has been incorporated and commenced the business before on

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2019
You are being appointed as a Management consultant by Gramin Ltd., and the following information is provided to you, by the management of Gramin Ltd. Gramin Ltd. has been incorporated and commenced the business before one year ago, with an equity capital of ₹20 lakh, having a face value of ₹100 for each equity share. The following information is available, for the first year of operation : Price-earnings ratio: 12.50 Earnings of the Gramin Ltd. for the year just ended: ₹2,00,000 Dividend paid by Gramin Ltd.: ₹1,50,000 The Gramin Ltd. is expecting to maintain the current rate of earnings on investments. You are required to answer the following, by taking into consideration the Walter's model. (ii) Is the Gramin Ltd.'s Dividend pay-out ratio is optimal or not ?

Answer & Explanation:

(ii) Is the Gramin Ltd.'s Dividend pay-out ratio optimal? From the working notes, we have r = 10% and Ke = 8%. Since r > Ke (10% > 8%), the firm is a growth firm. For growth firms, the optimal dividend payout ratio is 0% according to Walter's model. Therefore, the current dividend payout ratio of 75% is not optimal.

Topics: Dividend Decisions

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