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    Certainly, Let's Solve Question 3 Using The Walter Model Formula. The Formula Is As Follows

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    Certainly, Let's Solve Question 3 Using The Walter Model Formula. The Formula Is As Follows

    Uploaded by

    mdakifali21
    6 views13 pages

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    6 views13 pages

    Certainly, Let's Solve Question 3 Using The Walter Model Formula. The Formula Is As Follows

    Uploaded by

    mdakifali21

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Certainly, let's solve Question 3 using the Walter Model formula.

    The formula is as follows:

    P=

    r−g

    D×(E+Pb)

    Where:

    P = Market price per share

    D = Dividend per share

    E = Earnings per share


    �

    Pb = Retained earnings per share

    r = Required rate of return (capitalization rate)

    g = Dividend growth rate

    Given values:

    E = Rs 10

    r = 10%

    Dividend pay-out options: 20%, 50%, 80%

    Calculation for 20% Dividend Pay-out:

    0.20

    0.20

    10

    D=0.20×E=0.20×10=Rs2
    �

    10

    Pb=E−D=10−2=Rs8

    Substitute these values into the formula:

    20

    10

    8
    )

    0.10

    0.06

    20%

    0.10−0.06

    2×(10+8)

    20

    18

    0.04

    20%

    0.04

    2×18
    �

    20

    36

    0.04

    20%

    0.04

    36

    20

    900

    20%

    =Rs900

    Calculation for 50% Dividend Pay-out:


    �

    0.50

    0.50

    10

    D=0.50×E=0.50×10=Rs5

    10

    5
    Pb=E−D=10−5=Rs5

    Substitute these values into the formula:

    50

    10

    0.10

    0.06

    50%

    0.10−0.06

    5×(10+5)

    50
    %

    15

    0.04

    50%

    0.04

    5×15

    50

    75

    0.04

    50%

    0.04

    75
    �

    50

    1875

    50%

    =Rs1875

    Calculation for 80% Dividend Pay-out:

    0.80

    0.80

    10

    D=0.80×E=0.80×10=Rs8
    �

    10

    Pb=E−D=10−8=Rs2

    Substitute these values into the formula:

    80

    10

    )
    0.10

    0.06

    80%

    0.10−0.06

    8×(10+2)

    80

    12

    0.04

    80%

    0.04

    8×12
    �

    80

    96

    0.04

    80%

    0.04

    96

    80

    2400

    80%

    =Rs2400

    Explanation:
    The market price per share is calculated for each dividend pay-out option (20%, 50%, 80%) using the
    Walter Model formula.

    The market price increases as the dividend pay-out decreases because a higher retention ratio leads to
    higher expected growth in dividends and, consequently, a higher market value of the share.

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