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104 Financial Management
Calculation of number of new shares to be issued
Dividends Paid
Dividends not Paid
Net Income 300000 300000
Total Dividends 180000 –
Retained Earnings 120000 300000
Investment Budget 600000 600000
Amount to be raised as
new shares 480000 300000
(Investment – Retained Earnings)
Relevant – Market Price
per share Rs. 106 Rs. 112
No. of new shares to be issued 4528.3 2678.6
Total number of shares at the
end of the year 300000 30000
Existing shares 4528.3 2678.6
(+) new shares issued 34528.3 32678.6
Market price per share Rs. 106 112
Market value for shares Rs. 3660000 3660000
There is no change in the total market value of shares whether dividends are distributed
or not distributed.
Exercise 3
ABC Ltd. has a capital of Rs. 10,00,000 in equity shares of Rs. 100 each. The shares
are currently quoted at par. The company proposes to declare a dividend of Rs. 10 per
share at the end of the current financial year. The capitalization rate for the risk class to
which the company belongs is 12%.
What will be the MP of the share at the end of the year, if
(i) A dividend is not declared.
(ii) A dividend is declared.
(iii) Assuming that the company pays the dividend and has net profits of Rs. 5,00,000
and makes new investments of Rs. 10,00,000 during the period, how many new
shares must be issued? Use the MM Model. (C.A Final Nov. 1990)
Solution
As per MM Model, the current MP of the share is
P o =
(i) If the dividend is not declared
100 =