10. A chemical company belongs to a risk class for which the appropriate price-earnings ratio is 10. It currently has 50,000 equity shares (outstanding) selling at `100 each. The firm is contemplating the declaration of `8 as dividend per share at the end of the current financial year which has just started. Given the assumption of Modigliani and Miller, answer the following:

(a) What will be the price of the share at the end of the year (i) if dividend is not declared; (ii) if dividend is declared?

(b) Assume that the firm paying the dividend has net profit of `5,00,000 and makes investment of `10,00,000 during the period, how many new shares must be issued?

[C.S. Final June 1996]

[Ans.

(a) `110, `102,

(b) 8824]