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Test Questions Dividend

1. What is meant by Dividend ?

2. Define Dividend.

3. What is cash dividend ?

4. What is meant by stock dividend?

5. Explain the concept of script dividend.

6. What is dividend pay-out ratio ?

7. List out the two main theories of dividend.

8. What is meant by dividend policy ?

9. Describe the factors that influence the dividend policy of a firm.

10. Write note on dividend policy in practice.

11. What are the different types of dividend policies ?

12. How for do you agree that dividends are irrelevant ?

13. Explain the various factors which influence the dividend decision of a firm.

14. “A firm should follow a policy of very high dividend pay-out”. Do you agree? Why or why     not?

15. What do you understand by a stable dividend policy ? Why should it be followed ?

 

    PROBLEMS AND SOLUTIONS

 

Problem 1. Following are the details regarding three companies A Ltd, B Ltd and C Ltd.

 

A Ltd                                      B Ltd                                     C Ltd

R = 15%                                  R = 5%                        R = 10%

Ke = 10%                                Ke = 10%                    Ke = 10%

E = $ 8                                               E = $ 8                         E = $ 8

 

Calculate the value of an equity share of each of these companies applying Walter’s

formula when dividend payment ratio (DIP ratio) is (a) 50%, (b) 75%, (c) 25%.

What conclusion do you draw ?

 

Solution:

 

Prof Walter has suggested the following formula for determining the market value of a share.

 

P = D +r/ke (E-D) ke

 

P = Market price of an equity share

 

D = Dividend per share

 

r = Internal rate of return

 

E = Earning per share

 

Ke = Cost of equity capital or capitalisation rate.

 

Value of an equity share according to Walter’s Formula

Conclusion

 

Based upon the above calculation

(i)    A Ltd :     This Company may be characterised as a growth firm.

(ii)   B Ltd :     This Company may be characterised as a declining firm.

(iii)  C Ltd :     This Company may be characterised as a normal firm.