CA Inter P6 · Chapter 8 · Question 4 of 8
The current market price of an equity share is ₹ 100 and the equity capitalisation rate is 12%. The company expects to declare a dividend of ₹ 6 per share at the end of the year. Under the Modigliani-Miller approach, the price per share at the end of the year if the dividend is paid will be:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) ₹ 106
Explanation
Under MM, P0 = (D1 + P1) / (1 + Ke), so P1 = P0(1 + Ke) - D1 = 100 x 1.12 - 6 = ₹ 106. If no dividend were paid, P1 would be ₹ 112. The shareholder's total wealth is the same either way (₹ 106 + ₹ 6 = ₹ 112), which shows MM's dividend irrelevance.
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