Walter Model Share Price Calculation

This solution calculates the price per share for Avanti Corporation using the Walter Model based on the provided financial data. The Walter Model evaluates the theoretical share price based on dividend policy and internal profitability.

Given Data:

• Earnings Per Share (EPS), denoted as $E$, is Rs. 4.0.
• The rate of return on investments, $S$, is 16% or 0.16.
• The required rate of return by shareholders, $K_e$, is 12% or 0.12.
• The payout ratio, $b$, is 40% or 0.40.

Walter Model Formula:

The formula for calculating the price per share ($P$) using the Walter Model is:

$P = \frac{D + \frac{S(E-D)}{K_e}}{K_e}$

Where $D$ represents the Dividend per share.

Step-by-Step Calculation:

1. Calculate Dividend Per Share (D):

   The dividend per share is determined by multiplying the EPS by the payout ratio.

   $D = E \times b = \text{Rs. } 4.0 \times 0.40 = \text{Rs. } 1.6$

2. Calculate Retained Earnings Per Share (E-D):

   Retained earnings per share is the portion of EPS not paid out as dividends.

   $E - D = \text{Rs. } 4.0 - \text{Rs. } 1.6 = \text{Rs. } 2.4$

3. Apply the Walter Model Formula:

   Substitute the known values and calculated amounts into the Walter Model formula:

   $P = \frac{\text{Rs. } 1.6 + \frac{0.16 \times (\text{Rs. } 2.4)}{0.12}}{0.12}$

4. Simplify the Expression:

   Calculate the value derived from retained earnings:

   $\frac{0.16 \times 2.4}{0.12} = \frac{0.384}{0.12} = 3.2$

   Add this value to the dividend per share:

   $\text{Rs. } 1.6 + 3.2 = \text{Rs. } 4.8$

   Finally, divide the result by the required rate of return ($K_e$):

   $P = \frac{\text{Rs. } 4.8}{0.12} = \text{Rs. } 40$

Conclusion:

The calculated price per share for Avanti Corporation, using the Walter Model, is Rs. 40.