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Financial Management and Dividend Policies

This document provides examples and practice questions related to financial management and dividend policy. It includes examples calculating market price per share under different models, given information about dividends, earnings, and capitalization rates. It also includes a practice question about Modigliani and Miller's dividend irrelevance theory and determinants of dividend policy. Finally, it provides a practice question about how a company's value would be affected if it did or did not pay a dividend, requiring supporting computations.

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Gadafi Fuad
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311 views1 page

Financial Management and Dividend Policies

This document provides examples and practice questions related to financial management and dividend policy. It includes examples calculating market price per share under different models, given information about dividends, earnings, and capitalization rates. It also includes a practice question about Modigliani and Miller's dividend irrelevance theory and determinants of dividend policy. Finally, it provides a practice question about how a company's value would be affected if it did or did not pay a dividend, requiring supporting computations.

Uploaded by

Gadafi Fuad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

FINANCIAL MANAGEMENT COVENANT FINANCIAL CONSULTANTS

Example 1: MM Example

A company has a capital of TZS 100 Million divided into shares of 100@. Dividend proposed at
the yearend is TZS 10 per share. Shares are currently quoted at per. If market capitalization is 13%,
calculate the market price:

a. If dividend is declared
b. If dividend is not declared
c. Dividend paid, earnings are TZS 50 Mil, and the company wishes to make new investment
of 100 Milion. How many shares must be issued under MM Model?

Example 2: Share price under Walters Model:

Given that EPS is TZS 100, DPS is 60 and capitalization rate is 10% while company IRR is 15 %.
Compute MPS

Example 3 Share Price under GGM

a. Given a payout ratio of 10%, EPS of 2000 and IRR of 18%. Calculate the value of the
share.
b. What if D/P changes to 15%?

PRACTISE QUESTION (Adopted from NBAA Nov 2016 Qn-4)


(a) According to Modigliani and Miller (M & M) theory, dividend policy is irrelevant in a world
of frictionless capital market. How did Miller and Modigliani arrive to this conclusion?
(6marks)
(b) Discuss, using appropriate theories, any three determinants of dividend policy and decisions
in real world. (9 marks)
(c) Crane Ltd. is listed in the local stock exchange. Currently, the company has 2 billion
outstanding shares selling at market price of TZS.100 per share. The company has no
borrowing and has internal funds available to make a capital expenditure of TZS.30 billion.
The capital expenditure is expected to yield a positive net present value of TZS.20 billion. The
firm also wants to pay a dividend per share ofTZS.l5. Given the company’s Capital expenditure
plan and its policy of zero borrowing, the company will have to issue new shares to finance
payment of dividend to its shareholders.

REQUIRED:
With supporting computations, explain how Crane Ltd’s value will be affected.
i) If it does not pay any dividend (2 marks)
ii) If it pays the TZS. 15 dividend (3 marks) (Total: 20marks)

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