Tag: financial management

Questions Related to financial management

Who formulated the following model for estimating the market price of equity share?
$P = \dfrac {D + \dfrac {R _{a}}{R _{c}}(E - D)}{R _{c}}$
Where, $P =$ Market price of equity share
$D = DPS$
$E = EPS$
$E - D =$ Retained earning per share
$R _{a} =$ Internal rate of return on investment
$R _{c} =$ Cost of capital.

functional area of management financial management nature and significance of management organisation of commerce and management business studies

  1. Modigliani-Miller

  2. Myron-Gordon

  3. James E. Walter

  4. Clarkson and Elliot

Show answer
Correct Option: C
Explanation:
Professor James E. Walter that the choice of dividend policies almost always affects the value of the enterprise. His model shows clearly the importance of the relationship between the firm’s internal rate of return (r) and its cost of capital $(k)$ in determining the dividend policy that will maximize the wealth of shareholders.

Walter’s formula to calculate the market price per share (P) is:

$P=\cfrac {\cfrac {D}{k}+\cfrac {E-D}{k} \times r} {k}$

P = market price per share
D = dividend per share
E = earnings per share

Which one of the following is not among the assumptions of the Modigliani-Miller model?

functional area of management financial management nature and significance of management organisation of commerce and management business studies

  1. Perfect capital market

  2. Equivalent risk classes

  3. Unity for dividend payout ratio

  4. Absence of taxes

Show answer
Correct Option: C
Explanation:

According to Modigliani and Miller (M-M), dividend policy of a firm is irrelevant as it does not affect the wealth of the shareholders. They argue that the value of the firm depends on the firm’s earnings which result from its investment policy. 
Modigliani and Miller model is based on the following assumptions : 
1. The firm operates in perfect capital market.

2.The firm has a fixed investment policy.
3. Absence of taxes.
4. Risk of uncertainty does not exist. That is, investors are able to forecast future prices and dividends with certainty and one discount rate is appropriate for all securities and all time periods.

Dividend warrants must be posted within ______ days from the date of declaration of dividend.

functional area of management financial management nature and significance of management organisation of commerce and management business studies

  1. 24

  2. 34

  3. 30

  4. 45

Show answer
Correct Option: C