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Pulini ASA is currently financed entirely by 1 million ordinary shares with a nominal value of 0.75 per share which were issued at par. The dividend paid by Pulini ASA have remained constant at 150 000 per annum and the market generally believes that the dividend will continue at this level indefinitely, given the information presently available. The current dividend of Pulini ASA is about to be declared and the current market price is 1.40.

The company has recently signed a contract to service factory equipment for an annual fee of 80 000 receivable in advance. The first annual fee has just been received. The contract which is to commence immediately, will entail the annual purchase of specialized materials costing 22 400 payable at the end of each year and will incur no other incremental costs. The contract will continue indefinitely and will have the same risk as the existing operators of Pulini ASA. No details of the contract have been communicated or leaked to the stock market.

You may assume for calculation purpose only that there is no time delay between the dates of declaration and the payment of the dividend.

a)    Estimate the cum div market value of Pulini ASA in each of the three situations:

a.    The details of the contract are not communicated to the market and the dividends are declared to be 150 000.

b.    The details of the contract are communicated to and believed by the market, but the dividends declared remain at 150 000

c.    The details of the contract are not communicated to the market, but the dividends declared fully reflect the incremental annual cash flow from the contract.

b)   Discuss whether a company can affect its marked price by altering its dividend policy

c)    Outline factors that might influence company management when deciding on the level of dividends to be declared

Ignore taxation in part (1a), but not in parts (1b) and (1c)

Subject: Business, Finance

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