DPS =
= EPS D/P Ratio
= EPS (1 Retention Ratio)
D/P Ratio =
100
D/P Ratio + Retention Ratio = 1
Or, D/P Ratio = 1 Retention Ratio
Or, Retention Ratio = 1 D/P Ratio
R/E Reinvestment = NI PD DDP
= (NI PD) b
P/E Ratio =
Maximum DPS =
Ke =
1
\
100
Or, P \E Ratio =
1
100
r =
Gordon Model :
P =
(1)
P = Market Price Per Share
D = Dividend Paid Per Share
E = Earning Per Share
r = ROI or IRR
Ke = Equity Capitalization Rate
b = Retention Ratio
E(1-b) = D
MM Model:
1. P
1
= P
0
(1 +Ke) D
1
2. P
0
=
1+1
1+
=
3. n =
(1)
1
4. External Financing = I (E nD
1
)
5. V = nP
0
=
( + )1 +
1 +
6. Capital Gain = P
1
P
0
Note : When dividend is not paid, D
1
= 0.
P
0
=Market price per share at the beginning of the year
P
1
= Market price per share at the end of the year
n = No of shares
n = No of new shares
D
1
=
Dividend paid per share
E = Earnings available or Net Income
I = Investment Required
Ke = Cost of equity
= Equity capitalization rate
= Discount rate
V = Value of the firm
D = E D/P Ratio
= E (1 Retention Ratio)
Ke =
1
\
100
r =
Stock Dividend:
W-1: No of additional shares = No of common stock Percentage of stock dividend
W-2: R/E transfer = No of additional shares Market price per share
New retained earning = Existing R/E R/E transfer
W-3: Additional paid up capital increase:
= No of additional shares (Market price per share Common stock price per share)
New additional paid up capital = Existing + Increase.
W-4: New Common Stock Value = (Existing stock unit + Additional) Common stock per unit
Stock Split : X to Y
No of shares = No of shares outstanding
Price per share = Current price