From the following information supplied to you ascertain whether the forms D$/$P ratio is optimal according to Walter model

Earnings of the firm

$4,00,000$

Dividend pay$-$out ratio

$75$ percent

Price$/$ earnings ratio

$25$

The firm started a year ago with the equity capital of $20,00,000.$ The number of shares outstanding is $20,000$ at a rate of rupees $100$ each. The firm is expected to maintain the current rate of earnings on investment.

Q A$).$ What should be the price earnings ratio at which dividend payout will have no effect on the value of the share?

QB$.)$ Will your decision change if the price earnings ratio is $10$ instead of $25?$

Answer rating: 100% (QA)

Before we get into the explanations and calculations lets understand the Walters model According to the Walters Model the choice of dividend payout ra... View the full answer