Problems on Walters model
1. Find out the market price per share from the following information under
different situation given below on the basis of Walters model.
Particulars Firm A Firm B Firm C
Rate of return ( R) 15% 10% 8%
Cost of capital (K) 10% 10% 10%
Earnings per share (E) Rs. 10 Rs. 10 Rs. 10
a) When no dividend is paid
b) When Rs. 4 dividend is paid
c) When Rs. 8 dividend is paid
d) When Rs.10 dividend is paid
2. Calculate market price per share using Walter‘s model
Particulars Firm A Firm B Firm C
Rate of return ( R) 15% 10% 8%
Cost of capital (K) 10% 10% 10%
Earnings per share (E) Rs. 40 Rs. 40 Rs. 40
a) When dividend payout ratio is 0%
b) When dividend payout ratio is 25%
c) When dividend payout ratio is 50%
d) When dividend payout ratio is 75%
e) When dividend payout ratio is 100%
3. From the following particulars of a firm, determine the market price per share,
when the dividend payout ratio is a) 0%, b) 25%, c) 50%, d) 100%
EPS Rs. 8
Cost of capital 15%
Rate of return 20%
4. From the following information supplied to you, ascertain whether the firm’s
dividend payout ratio is optimal according to Walter. The firm was started a
year ago with an equity capital of Rs. 20 lakhs.
Number of shares outstanding 20,000 at Rs. 100 each. The firm is exported
to maintain its current rate of ratings on investment.
Earnings of the firm Rs. 2,00,000
Dividend paid Rs. 1,50,000
Price earnings ratio 12.5
5. From the following information supplied to you, determine the theoretical
market value of equity shares of a company as per Walter’s model:
Earnings of the firm Rs. 5,00,000
Dividend paid Rs. 3,00,000
Number of shares outstanding 1,00,000
Price earnings ratio 8%
Rate of Return 15%
Gorden’s model
According to dividend policy of a firm affects a share price and value of the
firm it is based on the following assumptions:
1. The firms rate of return remains constant.
2. The firm’s overall cost of capital remains constant
3. Source of finance is through retain earnings only.
4. The firms has very long life.
Interpretations of Gorden’s model:
1. Growth firm (R is greater than K)
In case of growth firm market price per share will be maximum . when the
firm retains 100% of earnings. Hence, the optimum payout ratio for the growth
firm is 0%.
2. Normal firm (R is equal to K) [R= K]
In this case market value per share is not affected by the dividend policy. There
is no optimum pay out ratio for normal firm.
3. Declining firm ( R is lesser than K)
In case of Declining firm market price per share will be maximum .
when the firm retains 0% of earnings. Hence, the optimum payout ratio
for the growth firm is 100%.
The market price per share under Gorden model by using following formula:
E(1 − b)
P=
K − br
Where as,
E= earnings
b= retention ratio
k= cost of capital
r= rate of return
Problems on Gorden’s model
1. Following information is available in respect of three companies:
X ltd Y ltd Z ltd
r 15% 12% 8%
K 12% 12% 12%
E (Rs.) 20 20 20
Calculate the effect of dividend payout ratio under Gorden’s model if dividend
payout ratio are:
a) 10%
b) 50%
c) 70%
d) 80%
2. From the following particulars, determine the value of a share using
Gorden’s Model:
r= 15%
Ke= 14%
E= Rs. 25
Assuming dividend pay out ratios are= 10%, 20%,30% and 50%
3. Following information is available in respect of three companies. (Last
year question )
Particulars M ltd T ltd R ltd
r 12% 11% 8%
K 12% 12% 12%
E (Rs.) 20 20 20
Calculate the effect of dividend payment on the price of equity share under
Gordon’s model. Dividend pay our ratio are:
a) 50%
b) 70%
c) 90%
d) 100%
4. If Ke= 11% and EPS is 15%, calculate the stock value of ABC Ltd for:
i. r= 12%
ii. r= 11%
iii. r= 10%, for the various level of payment ratio:-
a) 10%
b) 20% by using Gorden’s Model.
5. Following are the details regarding 3 companies:
Particulars A ltd B ltd C ltd
r 20% 10% 8%
K 15% 10% 10%
E (Rs.) 10 10 10
From the above calculate the effect of dividend payout on the price of equity
shares of each of the above companies in, the following different situations, under
Gorden’s model and also give the garden’s model and also give the Gorden’s view
on the optimum dividend payout :
a) 40%
b) 60%
c) 50%
d) 80%
