Answered: What should be the dividend payout…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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ABC and company has been following a dividend policy which can maximize the market value
of the firm as per Walter’s model. Accordingly, each year, at dividend time the capital budget
is renewed in conjunction with the earnings of the periods and alternative investment
opportunities for the shareholders.
In the current year, the firm expects earnings of Rs.5,00,000. is estimated that the firm can earn
Rs.1,00,000 if the profits are retained. The investors have alternative investment opportunities
that will yield them 10% return. The firm has 50,000 shares outstanding. What should be the
dividend payout ratio in order to maximize the wealth of the shareholders?
Also find out the current market price of the share.

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