ACC501_Assignment_3.pdf - CHARLES STURT UNIVERSITY MASTER...

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Seng Viteysatya | CSU Intake 24 | ACC501-Assignment 3 Page 1 of 14 CHARLES STURT UNIVERSITY MASTER OF COMMERCE (GENERAL MANAGEMENT) PROGRAM, INTAKE24 ACC501: BUSINESS ACCOUNTING AND FINANCE ASSINGMENT 3 Due Date : 06 November 2017 Total Marks : 100 Weighting : 50% Facilitator : Lim Siok Jin Student : Seng Viteysatya
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Seng Viteysatya | CSU Intake 24 | ACC501-Assignment 3 Page 2 of 14 QUESTION 1: Cam plc, an all-equity firm, has the following earnings per share and dividend history (paid annually). Year Earnings per share Dividend per share This year 21c 8.0c Last year 18c 7.5c 2 years ago 16c 7.0c 3 years ago 13c 6.5c 4 years ago 14c 6.0c This year’s dividend has just been paid and the next is due in one year. Cam plc has an opportunity to invest in a new product, Fluff, during the next 2 years. The directors are considering cutting the dividend to 4c for each of the next 2 years to fund the project. However, the dividend in 3 years can be raised to 10c and will grow by 9 percent per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximization and required a rate of return of 13 percent for its owners. Required: a) If the directors chose to ignore the investment opportunity and dividends continued to grow at the historical rate, what would be the value of one share using the dividend valuation model? b) If the investment is accepted, and therefore dividends are cut for the next 2 years, what will be the value of one share? c) What are the dangers associated with dividend cuts and how might the firm alleviate them?
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Seng Viteysatya | CSU Intake 24 | ACC501-Assignment 3 Page 3 of 14 ANSWER 1: a) The value of one share if the investment is ignored P ° = d ° (1 + g) k ± − g g = ² 8 6 ³ − 1 = 0.074 P ° = 8(1 + 0.074) 0.13 − 0.74 = 153.42 cents = $1.53 Thus, ´ = $!. "# b) The value of one share if the investment is accepted P ° = d $ 1 + k ± + d % (1 + k ± ) % + p % (1 + k ± ) % d $ = 4 , d % = 4 , d = 10 , g = 0.09 , k ± = 0.13 P % = d k ± − g = 10 0.13 − 0.09 = 250 P ° = 4 1 + 0.13 + 4 (1 + 0.13) % + 250 (1 + 0.13) % = 202.45 cents = $2.02 Thus, ´ = $). ) c) Dangers of dividend cuts and how to alleviate them Dangers: - Firm is in serious financial trouble - The company's stock price usually drops sharply - Reputation of the company - Payment term from supplier will be more strictly to the company Alleviation of dangers of the dividend cuts:
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Seng Viteysatya | CSU Intake 24 | ACC501-Assignment 3 Page 4 of 14 - Keeping paying low and stable dividend to investors QUESTION 2: You have been asked to carry out a valuation of Zella plc, a listed company on the main Australian market. At the last year-end Zella’s summarized balance sheet is as shown in Table 1. Table 1 Zella, 01 May 20x8 Assets ($ Million) Fixed assets 300 Current assets 280 - Stocks (70) - Debtors (120) - Cash at bank (90) Liabilities Creditors: trade creditors due within 1 year 400 Creditors: trade creditor due after >1 year 50 Equities Shareholder’s funds (Net assets) 130 Table 2 Zella plc trading history Year-end Earnings per shares (cents) Dividend per share (cents) 20x8 20 10 20x7 18 9.5 20x6 17 9.0 20x5 16 8.0 20x4 13 7.0 20x3 12 6.0 20x2 10 5.5 20x1 10 5.0
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Seng Viteysatya | CSU Intake 24 | ACC501-Assignment 3 Page 5 of 14 Datastream has calculated a beta for Zella of 1.2 and this may be used as the appropriate
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