Managerial Finance – Problem Review Set – Dividends Policy 1) If a firm adopts a residual distribution policy‚ distributions are determined as a residual after funding the capital budget. Therefore‚ the better the firm’s investment opportunities‚ the lower its payout ratio should be. a. True b. False 2) Even if a stock split has no information content‚ and even if the dividend per share adjusted for the split is not increased‚ there can still be a real benefit (i.e.‚ a higher value
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product line. Dividend per share given by the company is Rs.2.5 Dividend policy has been to maintain a stable rupee dividend. What would be an appropriate dividend policy for ABC Industries Ltd.? Ans. The management of ABC Industries Ltd should recognize that it will be in constant need of more funds owing to its intended policy of moving into new product lines in growth-oriented industries. To the extent the shareholders have strong expectations about maintenance of the current dividend‚ the current
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rate. Answer: D Explanation: A) B) C) D) Because these cash flows are risky‚ we cannot discount them using the risk-free interest rate. Diff: 1 Topic: 9.1 Stock Prices‚ Returns‚ and the Investment Horizon Skill: Conceptual 2) When discounting dividends you should use? A) the weighted average cost of capital. B) the after tax weighted average cost of capital. C) the equity cost of capital. D) the before tax cost of debt. Answer: C Explanation: A) B) C) D) Diff: 1 Topic: 9.1 Stock Prices‚ Returns
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concerning an alteration of the current dividend rate. The current EPS of the company is now $14-$15. Historically‚ the dividend payout ratio mounts to an average 50%. So‚ the company expects payout the payout in 1959 to be $7/share. In the previous year the dividend rate was cut from $1.3 to $1.2 per share. But after the new deal‚ the CEO proposed a hike in the quarterly payout to $1.6 per share from the $1.2 given at present. The CEO even suggested the dividend rate to be propped up to $1.80 in 1960
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Nations Bank Purpose: The purpose of this case is to calculate a stock’s price using its past dividends as an indicator of future dividend growth rates. The student must determine the stock’s required rate of return (CAPM) and future expected dividend growth rate and use the Gordon Growth Model to calculate a current price. 1. The equation for CAPM is kj = Rf + [bj x (Rm - Rf)] where‚ kj = required return on asset j‚ Rf = risk-free rate of return‚ bj = beta coefficient for asset
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Case 19 Georgia Atlantic Company Dividend Policy CASE INFORMATION Purpose The purpose of this case is to have students examine dividend policy--cash dividends‚ stock splits‚ and stock dividends--from the viewpoint of its effect on corporate share prices. Time Required About one and a half hours of student preparation. If the case is to be written up and handed in‚ double the time required. Complexity A--relatively simple. Flexibility This case can be used in
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Sales $ 3‚000 Cost of goods sold (1‚600) Gross profit $ 1‚400 Operations expenses (970) Operating income $ 430 Interest expense (30) Income before tax $ 400 Income tax (200) Net income $ 200 Plus Jan. 1 retained earnings 150 Minus dividends (100) Dec. 31 retained earnings $ 250 Answer (A) is correct. (CIA‚ adapted) REQUIRED: The return on assets. DISCUSSION: The return on assets is the ratio of net income to total assets. It equals 21.1% ($200 NI ÷ $950 total assets). Answer
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Corporation (ICC) has been outstanding‚ there are some problems in respect of the share price appreciation. Firstly‚ P/E ratio will be used to evaluate the company’s stock and factors which affect company’s P/E ratio will be listed. Furthermore‚ discounted dividend valuation model will be demonstrated and fundamental factors which impact the share pricing will be analysed. Finally‚ the value of ICC at 30 June 2010 will be calculated using P/E ratio and DDM model. Meantime‚ the weakness of those two models will
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How to Value Bonds 1. What is the present value of a 10-year‚ pure discount bond paying $1‚000 at maturity if the appropriate interest rate is: a. 5 percent? b. 10 percent? c. 15 percent? 2. Microhard has issued a bond with the following characteristics: Principal: $1‚000 Time to maturity: 20 years Coupon rate: 8 percent‚ compounded semiannually Semiannual payments Calculate the price of this bond if the stated annual
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ratio.It may mislead some of investors to buy the stock . Apart from PE ratio‚ Dividend Discount Model (DDM) will be a better way to value the stock price. The DDM model seeks to value a stock by using predicted dividends and discounting them back to their present value. The Formula of DDM is Dividend per share over discount rate minus dividend growth rate. Value of Stock = D1 R- G Where‚ • DPS (1) = Dividends per
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