Class Assignment - 06/04/2020

1. MM Company currently has 50,000 outstanding shares selling at Rs.100 each. The firm expects to have a net earning of Rs.4,00,000 and contemplating a dividend of Rs.5 per share at the end of the current financial year. There is a proposal for making new investments of Rs.12,00,000. Assuming 10% cost of capital show that under the MM hypothesis, the payment of dividend does not affect the value of the firm.

2. Using Walter's model, illustrate the effect of different policies(D/P -0%, 25%, 50%, 75%, 100%) on the market price of share respectively for the growth firm, normal firm and declining firm from the following information in respect of a firm:

Capitalisation rate : 10%

Earnings per share: Rs.10

Assumed rate of investments For growth firm 0.15, for normal firm 0.10 and for declining firm 0.08.