Dividend Decision and Value of the Firm under MM Approach ~ Financial Management ~ B.Com/M.Com

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Explained the concept procedure and assumption under Modigliani and Miller approach with the help of a practical question which is given below:

Question : ABC Ltd. has a capital of Rs.10,00,000 in equity shares of Rs.100 each. The shares are currently quoted at par. The company proposes to declare a dividend of Rs.10 per share at the end of the current financial year. The capitalisation rate for the risk class to which the company belongs is 12%. What will be the market price of the share at the end of the current year if :
(i) A dividend is declared, (ii) A dividend is not declared.
(iii) Further assume that the company pays dividend and has a net profit of Rs.5,00,000 and makes new investment of Rs.10,00,000 during the period, how many new shares must issue ?
Use MM Model.


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