The Managing Director of a company decides that his company will not pay any dividend till he survives. His current life expectancy is 20 years. After that time it is expected that the company could pay dividend of ₹ 30

CS Professional · Corporate Restructuring, Valuation and Insolvency · PYQS · December 2018
The Managing Director of a company decides that his company will not pay any dividend till he survives. His current life expectancy is 20 years. After that time it is expected that the company could pay dividend of ₹ 30 per share indefinitely. At present the company could afford to pay ₹ 5 per share forever. The shareholders of the company expect return on equity @ 10%. Find out : (i) What would be the share price at the end of 20 years ? (ii) What would be the present value of a share using discounting factor of 0.1468 (at 10% for 20 years period) ? (iii) What is the current price of a share if dividend payment is ₹ 5 per share ? (iv) What is the loss to the shareholders in the aforesaid scenario ?

Answer & Explanation:

As per Managing Director's policy: The value of the share at the end of 20 years = 30/0.10 = ₹ 300 The present value of share = 300 × (0.1468) = ₹ 44.04 As per current status of company: If the company could pay dividends of ₹ 5 per share forever from the beginning, the current price of share would be = 5/0.10 = ₹ 50.00 Thus, the loss to each shareholder is the difference of two prices : ₹ 50 - ₹ 44.04 = ₹ 5.96 per share

Topics: Valuation

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