​Earnings per share of a company is Rs 4, Return on Investment is 20 percent and the return required by shareholder is 16 percent. Assuming Walter valuation model, if the payout ratio is 40 percent, what will be the price per share?

Correct option is C

To calculate the price per share using the Walter Model, we apply the formula:

​Where:

• P = Price per share
• D = Dividend per share = Payout Ratio × Earnings per Share
• r = Return on Investment (ROE) = 20%
• k = Cost of equity / Required rate of return = 16%
• E = Earnings per share = ₹4

Step 1: Calculate Dividend per share (D)

D = 40% of 4 = 0.4 × 4 = Rs. 1.60

Step 2: Substitute values into Walter’s formula

Therefore, the correct answer is Rs. 28.75

Information Booster:

• Walter’s model shows how dividend policy affects the value of the firm based on the relationship between return on investment (r) and the cost of capital (k).

• When r > k (as in this case, 20% > 16%), firm value increases if more earnings are retained rather than paid out as dividends.

• The price increases as the company is effectively reinvesting earnings at a higher return than what shareholders require.

• A lower payout ratio in this situation would result in even higher value per share under the Walter model.