Ew candidates then proceeded to calculate the

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ew candidates then proceeded to calculate the increased dividend capacity or provide reasoned comments. Therefore not all the requirements were addressed. For part (d) the main areas of weakness were that some candidates thought that only one of these methods would provide instant cash to the shareholders or that the requirement was not to compare the two methods with each other, but to discuss the importance of returning cash to shareholders.
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Copyright © ACCAspace.com ACCAspace 中国 ACCA 特许公认会计师教育平台 12 Limni Co 45mins (a) Dividend policy Many high-growth companies, such as Limni Co, retain cash instead of paying dividends and use the cash to help fund the growth. Many such companies declare an intention not to pay dividends and as such the shareholders expect their wealth to increase through capital gains rather than dividend payments.
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Copyright © ACCAspace.com ACCAspace 中国 ACCA 特许公认会计师教育平台 13 Limni Co 45mins Financing Capital structure theory s uggests that to take advantage of the tax shield on interest payments, companies should have a capital structure which is a mixture of debt and equity. Pecking order theory suggests that companies typically use internally generated funds before seeking to raise external funds (initially debt, then equity). The two main factors in deterring companies from seeking external finance are favouring one investor group at the expense of another and the agency effect of providing additional information to the market.
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Copyright © ACCAspace.com ACCAspace 中国 ACCA 特许公认会计师教育平台 14 Limni Co 45mins Limni Co is following the pecking order theory to the extent that it is using internally-generated funds first. However it is then deviating from pecking order theory in looking to raise equity finance rather than debt even though it currently has insignificant levels of debt and is therefore not making full use of the tax shield . This may be explained by the fact that Limni Co operates in a high-risk, rapidly changing industry, where business risk is high . It may not want to take on high levels of financial risk by using significant levels of debt finance. Other issues such as potentially restrictive debt covenant may also be a factor in the financing decision.
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Copyright © ACCAspace.com ACCAspace 中国 ACCA 特许公认会计师教育平台 15 Limni Co 45mins Risk management Managing the volatility of cash flows enables a company to plan its investment strategy more accurately. Limni Co needs to ensure that it will have sufficient internally-generated cash available when it is needed for planned investments . More importantly, since Limni Co faces high levels of business risk, as discussed above, the company should look to manage the risks that are beyond the individual control of the company's managers.
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Copyright © ACCAspace.com ACCAspace 中国 ACCA 特许公认会计师教育平台 16 Limni Co 45mins Effect on policies by returning funds to shareholders Returning funds to shareholders will affect each of these policies. The shareholder clientele could change, which may lead to share price fluctuations . However,
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