Dividend Decisions

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. 30 original test MCQs, 2 marks each. Practice and separate-test stems differ. T001-T010 use one shared case below; T011-T030 stand alone.

Original practice, not official ICAI questions or suggested answers. Scores are temporary and not synced to Study Hub. Contract/current-rule/accounting/tax boundaries are included in the review pack.

Not scored yet.

Palm Instruments: shared case for T001-T010

Shared case: Palm Instruments, T 001-T 010 Palm's next ordinary EPS E1 is Rs 8; for the distinct Walter exercise use ordinary earnings E=Rs 8 as expressly specified. Equity required return Ke is 12%, return on retained investment r 15%, retention b 40%. Gordon's constant model assumes stable parameters, retained-only/all-equity scope and Ke>g=br. No current market price is asserted. Gordon's next dividend is E1(1-b). For a separate Lintner forecast, the last just-paid dividend D0 is Rs 4, management's target payout 50% and adjustment factor.3. Apply Dnew=D0+[EPS x target-D0] x factor with EPS 8. This smoothing forecast is not required to equal the Gordon-policy dividend; the models ask different conditional questions. For one reverse Gordon valuation, hold next dividend fixed at Rs 4.8 and Ke 12%, and ask what constant growth would support a model price 100. Do not silently change the dividend with that reverse input. Shareholders may retain their own cash; no current dividend legality, cash capacity, tax, share issue, buyback or trade approval is established. All figures per share are Rs, with no taxes/frictions in the stipulated model calculations. Each first 10 question is independently scored.

Plan comparison	Value / stated unit
Required return Ke, percent	12
Reinvestment return r, percent	15
Retention b, percent	40

FM-C08-T001 · 2 marks

Read shared case

Under Gordon policy b 40%, payout?

A. 60%. B. 40%. C. 50% Lintner target. D. 30% adjustment.

FM-C08-T002 · 2 marks

Read shared case

Under Gordon policy, growth?

A. 6%. B. 40% b. C. 12% Ke. D. 15% r.

FM-C08-T003 · 2 marks

Read shared case

Gordon next dividend?

A. Rs 3.2 retained EPS. B. Rs 8 full earnings. C. Rs 4.8. D. Rs 4 Lintner forecast.

FM-C08-T004 · 2 marks

Read shared case

Gordon model price?

A. Rs 73.3333 Walter price. B. Rs 66.6667 full-payout price. C. Rs 40. D. Rs 80.

FM-C08-T005 · 2 marks

Read shared case

Walter model price with stated E 8/D 4.8?

A. Rs 73.3333. B. Rs 40 dividend-only. C. Rs 100. D. Rs 80 Gordon price.

FM-C08-T006 · 2 marks

Read shared case

Lintner target DPS?

A. Rs 2.4 adjustment-factor times EPS. B. Rs 4. C. Rs 3.2 retention. D. Rs 4.8 Gordon policy.

FM-C08-T007 · 2 marks

Read shared case

Lintner forecast dividend?

A. Rs 4.24. B. Rs 1.2 adjustment-only. C. Rs 4. D. Rs 4.8 must equal Gordon.

FM-C08-T008 · 2 marks

Read shared case

For constant Gordon r 15%/Ke 12%, admissible retention upper bound?

A. Strictly below.8; full retention violates Ke>g. B. Always zero retention mandatory. C. Any retention through 1 always valid. D. Exactly.8 produces valid finite price.

FM-C08-T009 · 2 marks

Read shared case

Hold D1=4.8/Ke 12%; model price 100 requires growth?

A. 4.8% dividend yield as growth. B. 12% Ke. C. 6% original case. D. 7.2%.

FM-C08-T010 · 2 marks

Read shared case

Walter/Gordon/Lintner outputs differ. What is supported?

A. They use distinct stipulated assumptions/questions, not actual quotes that must coincide. B. One model authorise s declaring dividend. C. All guarantee adequate payout cash. D. All are simultaneous observed exchange prices.

FM-C08-T011 · 2 marks

Beginning equity 100, rate 20%, retention 40%, productive retained funds. Next earnings?

A. 28 lakh adds retention to earnings incorrectly. B. 21.6 lakh. C. 12 lakh dividend as earnings. D. 20 lakh no growth.

FM-C08-T012 · 2 marks

A document labels both fixed DPS and fixed payout as stable. Best handling?

A. Treat the policies as mathematically identical. B. Describe the actual numerical behaviour instead of relying on ambiguous labels. C. Ignore EPS changes. D. Assume cash feasibility from label.

FM-C08-T013 · 2 marks

PAT 20, project 50, target equity 60%; no other cash/funds. Residual dividend formula produces what?

A. Negative 10 as actual dividend payment. B. 30 payout. C. Always 20 payout. D. Equity need 30 exceeds PAT 20, so no positive residual payout from these earnings and 10 funding gap.

FM-C08-T014 · 2 marks

Previous actual DPS 3, current EPS 4, target 50%, factor.5. New dividend and payout?

A. Rs 3.5 and 87.5%. B. Rs 2 and 50%. C. Rs 1 and 25%. D. Rs 2.5 and 62.5%.

FM-C08-T015 · 2 marks

Prior DPS 2, target DPS 4, factor 1. New DPS?

A. Rs 6. B. Rs 2. C. Rs 0. D. Rs 4.

FM-C08-T016 · 2 marks

Walter E fixed, r>Ke. As dividend increases within 0<=D<=E, model price does what?

A. Always rises. B. Becomes a current market quote. C. Falls because 1-r/Ke is negative. D. Always unchanged regardless of rates.

FM-C08-T017 · 2 marks

r=Ke, EPS 8. How many model payout optima?

A. Only 50%. B. Only full payout. C. Only zero payout. D. Any admissible payout gives same model price; no unique optimum.

FM-C08-T018 · 2 marks

E 6, r 20%, Ke 16%, nonnegative D<=6. Highest model price?

A. 150 from another case. B. 50 feasible at negative D. C. 46.875 at D=0. D. 37.5 at full payout as maximum.

FM-C08-T019 · 2 marks

E1=6, r=Ke 12%, b 1. Direct formula status?

A. Always 50 by direct valid substitution. B. Negative 50. C. 0/0 undefined and convergence condition fails, despite finite limit for b<1. D. Always zero because dividends zero.

FM-C08-T020 · 2 marks

E1=8, r 8%, Ke 12%, b.75. Model price?

A. 80. B. 33.3333. C. 66.6667 full payout. D. 50 at b.5.

FM-C08-T021 · 2 marks

D0=3, g 4%, Ke 10%, model price 52. Forward dividend yield and capital yield?

A. 4% and 6% swapped. B. 5.7692% and 4% using D0 as forward. C. 10% and 4%. D. 6% and 4%, total 10%.

FM-C08-T022 · 2 marks

D0=2, g 20% for 2 years then 5%, Ke 12%. P0?

A. 40.8. B. About 38.877551. C. 34.438776 terminal PV only. D. 43.2 terminal P2 un discounted.

FM-C08-T023 · 2 marks

First constant Rs 3 dividend at end year 3 forever, Ke 10%. P0?

A. 30 assumes first year 1. B. 22.539444 over discounts one extra year. C. 24.793388. D. 3.

FM-C08-T024 · 2 marks

P0=100, Ke 12%, D1=0. End price?

A. 112. B. 100 ignoring required return. C. 12. D. 102 forD10 case.

FM-C08-T025 · 2 marks

Funding gap 150000, end price 105. New shares in ideal continuous model?

A. 1429 as exact continuous quantity. B. 1428.571429. C. 1500 at wrong price 100. D. 909.090909 zero-dividend case.

FM-C08-T026 · 2 marks

Gap 600000, price 102, whole ordinary shares required. Minimum shares and overfunding?

A. 5882, no overfunding. B. 5882.352941 whole shares. C. 5883 and Rs 102. D. 5883 and Rs 66.

FM-C08-T027 · 2 marks

Holder 100 shares at 50 wants 500 cash, no issuer dividend, no fees/tax. Model sell count/remaining wealth?

A. Free 500 without reducing holdings. B. 20 sold, remaining 4000. C. 10 sold, 90 remain, value 4500 plus cash 500. D. Issuer creates 10 new shares.

FM-C08-T028 · 2 marks

Holder 120 shares at 90, 3-for-1 split with no other effects. Count/theoretical price?

A. 360 at 90 guaranteed gain. B. 360 shares at 30, wealth 10800 unchanged. C. 40 at 270 reverse direction. D. 144 at 75 bonus case.

FM-C08-T029 · 2 marks

Textbook page 5 quotes 15%/10% capital gains rates. Current real advice should do what?

A. Treat textbook as live current law source. B. Apply quoted rates universally today. C. Verify dated primary tax rules and taxpayer/asset specifics before asserting rates. D. Assume bonus always avoids 5% tax.

FM-C08-T030 · 2 marks

Textbook mentions next day after declaration. For actual share ex-date, safest source?

A. Current issuer/exchange notice with record/ex-date and settlement calendar. B. Only last years notice. C. Always next calendar day after declaration. D. Dividend model Ke.