Which of the following statements best describes a residual dividend policy?

• A.Dividends are paid at a constant rate.
• B.Dividends are paid only after the on-going operational needs of the business have been met.
• C.All surplus earnings are invested back into the business.
• D.Dividends are paid only if no further positive NPV projects are available.

Comment: *

Name: *

Email: *

Verification: *

A company wishes to raise new finance using a rights issue. The following data applies:
* There are 10 million shares in issue with a market value of $4 each
* The terms of the rights will be 1 new share for 4 existing shares held
* After the rights issue, the theoretical ex-rights price (TERP) will be $3.80 Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
$ ? million

Comment: *

Name: *

Email: *

Verification: *

An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
* A dividend of $500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is the fault with the calculation that has been performed?

• A.The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.
• B.The cost of equity used in the calculation should have been 15%; no adjustment was necessary.
• C.The cost of equity used in the calculation should have been 12% (15% subtract 3%).
• D.The dividend cashflow used should have been $500,000 rather than $540,000.

Comment: *

Name: *

Email: *

Verification: *

A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:

• A.$75,000
• B.$50,000
• C.$100,000
• D.$25,000

Comment: *

Name: *

Email: *

Verification: *

Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:

Which of the following is the best indication of the equity value of Company P?

• A.$48 million
• B.$24 million
• C.$40 million
• D.$80 million

Comment: *

Name: *

Email: *

Verification: *