Indiasoft Ltd. is forecasted to report a net income of Rs 40 million on shareholders' funds...
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Indiasoft Ltd. is forecasted to report a net income of Rs 40 million on shareholders' funds of Rs 200 million representing 10 million shares next year (2019-20). The company has historically paid 40% of its earnings as dividends and has witnessed stable profitability and growth. Indiasoft's CEO has proposed to the board changing the dividend payout to 60% of the net income from 2019-20 onwards, arguing that the stock's P/E (share price to earnings per share) should increase since investors tend to prefer higher dividends. Answer the following questions, assuming Gordon's constant growth dividend model is appropriate for Indiasoft's valuation: i. Estimate the value of the company with 20% and 50% dividend payout, based on a cost of equity of 16%, assuming that the return on equity would remain constant in the future. ii. What should be the P/E ratio with the two proposed dividend payout policies? iii. Due to industry developments, Indiasoft's financial forecasts are likely to change and its ROE is now expected to stabilize at a different level starting from 2019-20. At what level(s) of return on equity would an increase in dividend payout be justified as per Gordon's model? (7 marks) Indiasoft Ltd. is forecasted to report a net income of Rs 40 million on shareholders' funds of Rs 200 million representing 10 million shares next year (2019-20). The company has historically paid 40% of its earnings as dividends and has witnessed stable profitability and growth. Indiasoft's CEO has proposed to the board changing the dividend payout to 60% of the net income from 2019-20 onwards, arguing that the stock's P/E (share price to earnings per share) should increase since investors tend to prefer higher dividends. Answer the following questions, assuming Gordon's constant growth dividend model is appropriate for Indiasoft's valuation: i. Estimate the value of the company with 20% and 50% dividend payout, based on a cost of equity of 16%, assuming that the return on equity would remain constant in the future. ii. What should be the P/E ratio with the two proposed dividend payout policies? iii. Due to industry developments, Indiasoft's financial forecasts are likely to change and its ROE is now expected to stabilize at a different level starting from 2019-20. At what level(s) of return on equity would an increase in dividend payout be justified as per Gordon's model? (7 marks)
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Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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