Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.
They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.
Which THREE of the following statements are assumptions that are required in order to support this proposition?
Company W is a manufacturing company with three divisions, all of which are making profits:
• Division A which manufactures cars
• Division B which manufactures trucks
• Division C which manufactures agricultural machinery
Company W is facing severe competitive pressure in all of its markets, and is currently operating with a high level of gearing Company W's latest forecasts suggest that it needs to raise cash to avoid breaching loan covenants on its existing debt finance in 6 months' time
In a recent strategy review. Divisions A and B were identified as being the core divisions of Company W
The management of Division C is known to be interested in the possibility of a management buy-out. Company Z is known to be interested in making a takeover bid for Company W's truck manufacturing division
A rival to Company W has recently successfully demerged its business, this was well received by the Financial markets
Which of the following exit strategies will be most suitable for company W?
A listed company with a growing share price plans to finance a four-year research project with debt.
The main criterion for the finance is to minimise the annual cashflow payments on the debt.
The research will be sold at the end of the project.
Which of the following would be the most suitable financing method for the company?
A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.
The company has 100 million shares in issue.
Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.
The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.
Next year's earnings before interest and taxation are projected to be $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
• Profit before interest and tax for the current year is $500,000
• Long term debt of $300,000 at a fixed interest rate of 5%
• 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
The International Integrated Reporting Council (IIRC) was formed in August 2010 and brings together a cross-section of representatives from a wide variety of business sectors.
The primary purpose of the IIRC's framework is to help enable an organsation to communicate how it:
Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.
Relevant company data:
What is the best estimate of YYY's share price?
A company's directors plan to increase gearing to come in line with the industry average of 40%. They need to know what the effect will be on the company's WACC.
According to traditional theory of gearing the WACC is most likely to:
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently trade at $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.
What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently trade at $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.
What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?
TESTED 23 Feb 2025
