A company belongs to the risk class for which the appropriate capitalization rate is 10%. It currently has 25,000 shares outstanding selling at Rs....
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Question

A company belongs to the risk class for which the appropriate capitalization

rate is 10%. It currently has 25,000 shares outstanding selling at Rs. 100 each. The firm is contemplating the declaration of dividend of Rs. 5 per share at the end of the current financial year. The company expects to have a net income of Rs. 2.5 lacs and a proposal for making new investments of Rs. 5 lacs.


Show that under MM assumptions the payment of dividend does not affect the value of the firm.

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Step-by-step explanation

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