17. The Capital Asset Pricing Model (CAPM) disregards diversifiable ris. The determinants of the market value of the share are the perpetual stream of future dividends to be paid, the cost of capitaland the expected annual growth rate of the company. 6.54% c. 8.60% d. 9.14% e. 9.45%, All content in this area was uploaded by Alagathurai Ajanthan on Oct 21, 2014, 1. 79. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20. Subtracting a 5 percent risk discount from the firm's before-tax cost of debt. Thus, you will receive ($24.20 - $9.90) = $14.30, e¤ectively creating a new dividend policy or homemade dividend. The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free interest rate is 8%. stock, that adjusted beta would most likely be . Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00. d. Maximum rate which the firm should require on any projects it undertakes. 102. Convertible and exchangeable debt securities evidence both the right of the holders to receive such a repayment and to purchase an equity interest by converting the debt securities into, or exchanging the debt securities for, common or preferred stock. Increases with increasing levels of financial leverage. Dividend Policy Questions and Answers Test your understanding with practice problems and step-by-step solutions. Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. If sales rise by 1%, EBIT will rise by 1%. The index model has been estimated for stocks A and B with the foll. Risk-adjusted mutual fund performance measures have decreased in popularity because, 86. dividend policy influences the cost of capital In making these interrelated decisions, the goal is to maximize shareholder wealth. Use the following to answer questions 82-83: 82. c. It acknowledges that most new investment projects have about the same degree of risk. earnings report have on a firm’s share price? Return on the stock minus the risk-free rate. minimizes the company's weighted average cost of capital (WACC). If the earnings are negative, it is not relevant measure of risk and is based on the ex-post capital market line. a. Generally, listed companies draft their dividend policies and keep it on the website for the investors. 40%. If allowed returns on common stock are inadequate and. V. The risk-free rate defines where the SML intersects the Y axis. The main consideration in determining the dividend policy is the objective of maximisation of wealth of shareholders. 53. 52. The firm with greater financial leverage will have the higher value. If sales rise by 1%, EBIT will rise by 5%. b) Assumes that investors will be holding anywhere from one security to the entire market, to that security and not related to the financial. Does not adjust its hurdle rate up or down regardless of this fact. 95. 34. IV. You are in the right place! 30. Indicate that the professional management of the fund insures above market returns. Coefficient of variation of earnings per share (CV, Coefficient of variation of operating income (CV, An immediate increase in the share price, with no later adjustments, An asset’s market (systematic) risk is measured by i. Adding a 5 percent risk premium to the firm's before-tax cost of debt. more information is necessary to answer this question, the two stocks have the same geometric average return. That interest expense and taxes are included in the calculation. dividend payout ratio of the company and the relationship between the internal rate of return of the company and the cost of capital. There is a market premium required for bonds. 29. A single, overall cost of capital is often used to evaluate projects because: a. b. Residual dividend policy. The results indicate a positive relationship between ‘BS; BC; CEOD; ROE; ROA and DERwhereas The cost of capital for a firm, when we all. ignored totally when internal equity funding is utilized. should be , and the required return on Acme's comm. It avoids the problem of computing the required rate of return for each investment proposal. The assets are perfectly negatively correlated. A quick approximation of the typical firm's cost of equi, 28. 2. Companies need financial resources Dividend Distribution Policy, which shall be disclosed in its Annual Report and on its website. Dividend Policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (pa… Institutional considerations; current income; dividends. A dividend reinvestment plan (DRIP) is __________. we don’t multiply 10 by one minus the tax rate before continuing our calculation. None of the above is correct. profitability of companies should be considered carefully. Investors' discount rates increase with time due to uncertainty. Ignore tax: 59. The stock is ______ so the investor should _______ : expected return on a stock is 17.40%, what is the beta of the stock? of financing, what will be the expected share price? wealth for shareholders arising from the new project? dollar-weighted return on the stock will be __________; your time-weighted, you would calculate the return on the market portfoli. From the firm's perspective there is no tax advantage for debt because the commission effectively passes the tax savings through the consumers. declined for stocks with betas less than 1.0. This is consistent with the goal of maximizing shareholder val. In simple words, Dividend Policy is the set of guidelines or rules that the company frames for distributing dividends in years of profitability. Problems n Solutions {644F331F-5665-4789-B141-4A5B60389B32}.tb14. The purpose of this paper is to identify the determinants of dividend policy in an emerging and developing market.,The study employs a quantitative approach using 191 Sri Lankan firms and 1,337 firm-year observations as the sample. Only be considered when two projects have the same net present value. Modigliani and Miller argue that investors prefer dividends to capital gains. There is no benefit as shareholders will not be receiving any cash. View Homework Help - Assignment 2.pdf from ADM 3350 at University of Ottawa. coupon rate multiplied by the par value of the stock. were selected from those which were listed inCSE during the 2007-2012. 1 = bonds; 2 = common stock; 3 = preferred stock. If the correlation coefficient were -1, a zero variance portfolio could be constructed. 55. The SML would exhibit a parallel shift upward. Institutional investors like to match regular payments with regular income, Investment policy is the only wealth-creating decision made by managers, Firms establish shareholder clienteles due to their dividend policy, Shareholders can make homemade dividends by selling shares, Dividends represent a residual payment to shareholders, Questions 24 and 25 refer to the following dividend policies.