Diva Ltd. has 10 lakh equity shares outstanding at the end of accounting year 2014-15. The current market price of the shares is ₹150 each. The Board of directors of the company has recommended ₹8 per share as dividend.

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2015
Diva Ltd. has 10 lakh equity shares outstanding at the end of accounting year 2014-15. The current market price of the shares is ₹150 each. The Board of directors of the company has recommended ₹8 per share as dividend. The rate of capitalisation appropriate to the risk class to which the company belongs is 12%. Based on Modigliani-Miller approach, calculate the market price of the share if the recommended dividend is - (a) declared; and (b) not declared.

Answer & Explanation:

Computation of market price under MM Approach (a) If dividend is declared P 0 = (D 1 + P 1 ) / (1 + K e ) P 1 = P 0 (1 + K e ) - D 1 = 150(1 + 0.12) - 8 = ₹160 (b) If dividend is not declared P 1 = P 0 (1 + K e ) - D 1 = 150(1 + 0.12) - 0 = ₹168 Where P 0 = Current market price of share D 1 = Dividend K e = rate of capitalisation

Topics: Dividend Policy

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