CA Inter P6 · Chapter 8 · Question 6 of 8
A company's dividend for the last year was ₹ 3 per share. EPS for the current year is ₹ 10, the target payout ratio is 50% and the speed of adjustment is 0.6. Using Lintner's model, the expected dividend for the current year is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) ₹ 4.20
Explanation
Lintner's model: D1 = D0 + [(EPS x target payout) - D0] x adjustment factor = 3 + [(10 x 0.5) - 3] x 0.6 = 3 + 2 x 0.6 = ₹ 4.20. The model shows that firms adjust dividends gradually towards the target rather than jumping to ₹ 5 at once.
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