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Topic 10 FINC 2011 Tutorial Solutions

Topic 10 FINC 2011 Tutorial Solutions - FINC 2011 Corporate...

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FINC 2011 Corporate Finance 1 Tutorial Questions and Solutions Topic 10 – Dividend Policy DQ 3 Briefly outline the typical dividend payment process and define the following terms: (a) Cum-dividend price. (b) Ex-dividend date. (c) Books close [Record] date. A N S W E R Dividends are usually paid in the form of cash. Depending on the company’s Articles of Association, the final dividend may require approval of the shareholders at the AGM. Management usually decides on interim dividends. (a) Once a dividend is declared the stock trades ‘cum-dividend’; i.e. with the dividend attached. The share price at this time is known as the ‘cum-dividend price’. (b) At some point after a dividend is declared, the shares go ‘ex-dividend’, meaning that new purchasers of the shares are no longer entitled to the dividend. The day on which the dividend and the stock separate is known as the ‘ex-dividend date’. (c) The books closing date is the day nominated as the final day for registration as owner of a stock to determine who is entitled to receive the dividend. DQ 8 a) Miller & Modigliani showed that, under a restrictive set of assumptions, the  dividend policy is irrelevant to the company’s value. b) Describe how the dividend policy irrelevance is proved algebraically, (you do  not need to present algebraic proof).   A N S W E R The main assumptions underlying the irrelevance proof are: There are no costs issuing shares There are no costs of trading shares All market participants (e.g. management and shareholders) have the same information There are no personal or corporate taxes.
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(b) Choose any three market ‘imperfections’ and describe how their  existence may  result in dividend policy being relevant to company  value. A N S W E R There are no costs of issuing shares : - The cost of issuing shares varies depending on the amount of capital raised. Smaller issues tend to have a higher percentage cost. If the costs associated with issuing shares are
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