The Earning per share of a company is ₹16. The market capitalization rate applicable to the company is 12.5%. Retained earnings can be employed to yield a return of 10%. The company is considering a payout of 25%, 50% an

Shareholder's wealth would be maximized only when the market price (value) per share of common stock of the company is maximized. Walter's Model helps in ascertaining the market price of shares under various payout ratios. The market price of each share under various payout ratio using Walter model: Market Price per share = [DPS + r/Kₑ (EPS - DPS)] / Kₑ Where, DPS = Dividend per share, EPS = Earning per share, r = return on Investment and Kₑ = Capitalization rate. D/P ratio D/P ratio 25% 50% 75% Market Price per share 4 + 0.10/0.125(16-4) / 0.125 8 + 0.10/0.125 (16-8) / 0.125 12 + 0.10/0.125 (16-12) / 0.125 = ₹108.80 = ₹115.20 = ₹121.60 Above result shows that the wealth of the shareholders would be maximized when the company adopts 75% payout ratio.