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Walter's Model Formula: Unit - Iv Part - C Problems and Solutions

The document discusses Walter's model and Gordon growth model formulas for calculating the theoretical price of a share. (1) Walter's model formula uses earnings per share, dividends per share, internal rate of return, and required rate of return to calculate price per share. (2) Gordon growth model formula uses expected dividend per share, required rate of return, and expected dividend growth rate to calculate intrinsic value. (3) Several examples are provided and solved applying the formulas to calculate theoretical share prices using given earnings per share, dividend payout ratios, internal rates of return, and required rates of return.

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Harihara Puthiran
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3K views3 pages

Walter's Model Formula: Unit - Iv Part - C Problems and Solutions

The document discusses Walter's model and Gordon growth model formulas for calculating the theoretical price of a share. (1) Walter's model formula uses earnings per share, dividends per share, internal rate of return, and required rate of return to calculate price per share. (2) Gordon growth model formula uses expected dividend per share, required rate of return, and expected dividend growth rate to calculate intrinsic value. (3) Several examples are provided and solved applying the formulas to calculate theoretical share prices using given earnings per share, dividend payout ratios, internal rates of return, and required rates of return.

Uploaded by

Harihara Puthiran
Copyright
© © All Rights Reserved
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UNIT – IV

PART – C
Problems and solutions.

Walter’s Model Formula  


According to Walter’s Model Formula, the market value of a share
can be given as:

P = D + (E-D) ( r/k ) / k
Here, 

P = The value of the share price on every equity (price per equity share) 

D = The dividend value on every share (dividend per share)

E = The value of earning on every share (earnings per share)

(E-D) = The value that comes after subtracting the dividend of share
from earning (retained earnings per share). 

r = The value of return on every investment (rate of return on


investments) 

K = It is the cost of equity. 

1. The earnings per share of a company is Rs. 10. It has an internal rate of return of 15
percent and the required rate of return of its risk class is 12.5 percent. The dividend
per share is Rs. 4. If Walter’s model is used what is the price of the share.

Solutions:
What is the Gordon Growth Model formula?

Three variables are included in the Gordon Growth Model formula:

(1) D1 or the expected annual dividend per share for the following year,

(2) k or the required rate of return, and

(3) g or the expected dividend growth rate. With these variables, the value
of the stock can be computed as:

Intrinsic Value = D1 / (k – g)

16. The following data is available about XYZ ltd. Earnings per share; Rs.5,
Required rate of return is 16%. Assume Gordon model, to find the price of the
share if dividend pay-out ratio is 40% and internal rate of return is 20%

2. A company has EPS of Rs. 10 and internal rate of return of 15 percent. The firm
has a policy of paying 40 percent as dividend payout ratio. If the required rate of
return is 10 percent, determine the price of share under (a) Walter model (b)
Gordon model

3.The following information is available in respect of ABC Ltd.


EPS Rs. 10
Rate of return 20%
Required rate of return 16%

Find out the market price of the share under Gordon model if the firm follows a dividend
payout ratio of 50%.

4.A company has a EPS of Rs. 1.5, internal rate of return of 15% and retention ratio of 50%.
If the required rate of return of the firm is 10%, determine the price of its share using Gordon
model.
What shall happen to the price of the share of the company has a retention ratio of 20%?
3. From the following information, determine the market value of equity shares of a
company as per Walter’s model
Earnings per share Rs. 4

Dividends per share Rs. 2.50

Price – Earnings ratio (P/E) 8

Internal Rate of return 15%

5. The following information is available for Avanti Corporation


Earnings per share Rs. 4.00

Internal Rate of return 18%

Required rate of return 15%

What will be the price per share as per Walter’s model if the dividend payout ratio is 40%?

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