Reference no: EM132547899

Question i. Your DPS is Rs.0.55 out of EPS of Rs.1.25. The price of stock is Rs.10.50 per share. The value of total assets is Rs.9 million with 40% by debt. In preceding years, your return on equity (ROE) was 16%, with expectation to continue.

a. Calculate the growth rate growth rate (growth rate = Retention rate x return on equity)

b. What is the required return on the stock?

c. If you change the dividend policy with an annual dividend of Rs.1.30 per share, what would be new growth rate and required return if everything else remains same?

Question ii. In 2000, you paid dividends of Rs.2,500,000 out of net income of Rs.9.8 million. You had constant long-run growth rate of 10%. However, in 2001, earnings are supposed to be Rs.13.4 million and you need investment of Rs.7.4 million. You do not expect to continue the growth of 2001 and will sustain the original growth rate of 10%. The capital structure is 40% debt and 60% equity.

Required: Calculate total dividends for 2001 under following alternatives:

a. 2001 dividend payment will remain at the long-run growth rate in earnings.

b. Dividend payout ratio of 2000 will continue.

c. You follow residual dividend model.