BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 6 Tutorial Questions
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Question 1 (PAVLON)
Pavlon Inc has recently obtained a listing on the Stock Exchange. 90% of the company’s shares were
previously owned by members of one family but, since the listing, approximately 60% of the issued
shares have been owned by other investors.
Pavlon’s earnings and dividends for the five years prior to the listing are detailed below:
Years prior to listing Profit after tax Dividend per share (cents)
5 1,800,000 3.6
4 2,400,000 4.8
3 3,850,000 6.16
2 4,100,000 6.56
1 4,450,000 7.12
Current year 5,500,000 (estimate)
The number of issued ordinary shares was increased by 25% three years prior to the listing and by 50% at
the time of the listing. The company’s authorised capital is currently $25,000,000 in 25¢ ordinary shares,
of which 40,000,000 shares have been issued. The market value of the company’s equity is $78,000,000.
The board of directors is discussing future dividend policy. An interim dividend of 3.16 cents per share
was paid immediately prior to the listing and the finance director has suggested a final dividend of 2.34
cents per share.
The company’s declared objective is to maximise shareholder wealth.
Required:
(a) Comment upon the nature of the company’s dividend policy prior to the listing and discuss whether
such a policy is likely to be suitable for a company listed on the Stock Exchange. (5
marks)
(b) Discuss whether the proposed final dividend of 2.34 cents is likely to be an appropriate dividend:
(i) If the majority of shares are owned by wealthy private individuals; and
(ii) If the majority of shares are owned by institutional investors. (10 marks)
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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 6 Tutorial Questions
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Question 2 (DD)
DD Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The
current dividend per share of the company is 50c per share and it expects that its next dividend per share,
payable in one year’s time, will be 52c per share.
The capital structure of the company is as follows:
$m $m
Bond A will be redeemed at par in ten years’ time and pays annual interest of 9%. The cost of debt of this
bond is 9.83% per year. The current ex interest market price of the bond is $95.08.
Bond B will be redeemed at par in four years’ time and pays annual interest of 8%. The cost of debt of
this bond is 7.82% per year. The current ex interest market price of the bond is $102.01. DD Co has a cost
of equity of 12.4%. Ignore taxation.
Required:
(a) Calculate the following values for DD Co:
(i) ex-dividend share price, using the dividend growth model; (3 marks)
(ii) capital gearing (debt divided by debt plus equity) using market values; and (2 marks)
(b) Discuss whether a change in dividend policy will affect the share price of DD Co. (8 marks)
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BBMF2814 FINANCIAL MANAGEMENT 2 RAC
Week 6 Tutorial Questions
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Question 3 (ECHO)
