11. A company belongs to a risk class for which the appropriate capitalisation rate for is 10%. It currently has 25,000 shares selling at `100 each. The firm is contemplating the declaration of `5 as dividend at the end of the current financial year. The company expects to have a Net Income of `2.5 lakhs and has a proposal for making new investments of `5 lakhs. Show that under the M-M assumptions, the payment of dividend does not affect the value of the firm at the end of the year. [C.S. Final June 1997]

[Ans.

(a) P1 = `105, 110,

(b) New shares = 3571, 2273,

(c) Value = `30 lakhs]