(i) Clientele effect
- Assumes that there is a tendency for him to attract investors who like the firm’s dividend
policy. Therefore investors who desire current investment income would purchase shares
in high dividend payout forms.
- Change in prices after dividend announcement is thus due to demand and supply forces
occasioned by the investors keen on benefiting out of dividend announcement
- The implication of the dividend-clientele effect on dividend policy is that firms establish
dividend policies that they deem would contribute to wealth maximization.
- The shareholders who do not like this policy sell their shares to those keen on driving
dividend benefit.
- On the other hand, because of high switching costs (exit and entry) management is forced
to establish dividend policies that meet investors.
- Investors who want current investment income should own shares in high dividend
payout firms, while investors with no need for current investment income should own
shares in low dividend payout firms.
(ii) Homemade dividend
- Refers to ability of stock holders to liquidate part of their holding hence realize cash
inflow in lieu of dividend income.
- Implication of homemade dividend is that dividend policy is irrelevant and the argument
is that paying or not paying dividend has a capital gain effect: paying dividends lead to an
appreciation in stock values when dividends are not paid, stock prices fall.
- It is possible for investors to create homemade dividends thus the firm may opt to pay
dividend and let investors to choose their own dividend policy. The firm can retain the
profits and plough them through re-investment or can buy back shares.
- It ignores the signaling effect that a declared dividend will name.
Kavungya answered the question on May 5, 2022 at 13:40
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Nazitum Ltd. has current earnings per share of sh. 4.00. The company’s dividend for the previous year was sh. 1.50 per share and it has...
(Solved)
Nazitum Ltd. has current earnings per share of sh. 4.00. The company’s dividend for the previous year was sh. 1.50 per share and it has a target payout ratio of 0.60. The management of the company adjusts its dividend over two years.
Required:
The dividend per share for the current year.
Date posted:
May 5, 2022
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Answers (1)
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Davirex Ltd’s share has a nominal value of sh. 80. The company pays 10% of the nominal value of the share as dividend for the...
(Solved)
Davirex Ltd’s share has a nominal value of sh. 80. The company pays 10% of the nominal value of the share as dividend for the year. The current market price of the share is sh. 160 with 15% earnings yield.
Required:
i. Earnings per share.
ii. Dividend cover.
iii. Price – earnings ratio.
Date posted:
May 5, 2022
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Answers (1)
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Outline four advantages of paying scrip dividends
(Solved)
Outline four advantages of paying scrip dividends
Date posted:
May 5, 2022
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Answers (1)
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Highlight four assumptions necessary for the dividend irrelevance theory to hold.
(Solved)
Highlight four assumptions necessary for the dividend irrelevance theory to hold.
Date posted:
May 5, 2022
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Answers (1)
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Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per...
(Solved)
Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per share. The company's earnings per share is Sh.10 and it intends to maintain a dividend pay-out ratio of 50% at the end of the current financial year. The expected net income for the current year is Sh.3 million and the available investment proposals are estimated to cost Sh.6 million.
Required;-
Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm.
Date posted:
May 5, 2022
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Answers (1)
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Describe two types of dividends which a corporate entity could pay its shareholders.
(Solved)
Describe two types of dividends which a corporate entity could pay its shareholders.
Date posted:
May 5, 2022
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Answers (1)
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Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd.,...
(Solved)
Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd., a company quoted on the stock exchange. The dividend payments from this investment makes up a significant position of Mrs Waziri’s income. She was alarmed when ABC Ltd. dropped its year 2001 dividend to Sh.1.25 per share from Sh.1.75 per share which it had paid in the previous two years.
Mrs Waziri has approached you for advice and you have gathered the information given below regarding the financial condition of ABC Ltd. and the finance sector as a whole.
ABC Ltd. Balance Sheets as at 31 October
Notes:
1. Industry ratios have been roughly constant for the past four years.
2. Inventory turnover, total assets turnover and fixed assets turnover are based on the year-end
balance sheet figures.
Required:
(a) The financial ratios for ABC Ltd for the past three years corresponding to industry ratios given above.
(b) Arrange the ratios calculated in (a) above in columnar form and summarise the strengths and weaknesses revealed by these ratios based on:
(i) Trends in the firm’s ratios
(ii) Comparison with industry averages.
(The summary should focus on the liquidity, profitability and turnover ratios).
Date posted:
May 5, 2022
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Answers (1)
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The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm...
(Solved)
The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm as at 31 December 2001 is as follows:
Date posted:
May 5, 2022
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Answers (1)
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The following information represents the financial position and financial results of AMETEX limited for the year ended 31 December 2002.
(Solved)
The following information represents the financial position and financial results of AMETEX limited for the year ended 31 December 2002.
Additional Information
1. The company’ ordinary shares are selling at sh. 20 in the stock market
2. The company has a constant dividend payout of 10%
Required:
i) Acid test ratio
ii) Operating Ratio
iii) Return on total capital employed
iv) Price earnings ratio
v) Interest coverage ratio
vi) Total assets turnover
Determine the working capital cycle for the company.
Date posted:
May 5, 2022
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Answers (1)
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Mijengo Ltd. And Vyumba ltd are medium-sized companies dealing in the sale of new residential houses. The following information was extracted from the financial records...
(Solved)
Mijengo Ltd. And Vyumba ltd are medium-sized companies dealing in the sale of new residential houses. The following information was extracted from the financial records of the two companies for the year ended 31st December 2005:
Required:
i) Gearing ratio for each company
ii) Earnings per share for each company
iii) Price earnings ratio for each company
iv) Interpret your result obtained in (i) and (ii) above
Date posted:
May 5, 2022
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Answers (1)
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The following is an extract of the balance sheet of Shauri Moyo limited as at 31 December 2005
(Solved)
The following is an extract of the balance sheet of Shauri Moyo limited as at 31 December 2005
Date posted:
May 5, 2022
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Answers (1)
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Sunrise Limited presented the following financial statements for the year ended 31 December 2008:
(Solved)
Sunrise Limited presented the following financial statements for the year ended 31 December 2008:
Assume a 360 – day year.
Required:
i) Operating cash style
ii) Quick ratio
iii) Current ratio
iv) Debt to equity ratio
v) Operating margin ratio
vi) Debt turnover ratio
Date posted:
May 5, 2022
.
Answers (1)
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The following statement of financial position relates to Mageuzi Ltd. as a t 31 December 2009.
(Solved)
The following statement of financial position relates to Mageuzi Ltd. as a t 31 December 2009.
Additional information:
1. Sales in the in the year ended 31 December 2009 amounted to sh. 20 million. The sales for the
current year ending 31 December 2010 are expected to increase by sh. 4 million.
2. The net profit margin and retention ratio for the year ended 31 December 2009 were 8 % and 30%
respectively. These ratios are expected to be maintained in the foreseeable future.
3. All assets and current liabilities are expected to change in the current year ending 31 December
2010 at the same percentage as the change in sales.
Required:
i) The amount of external financial requirements for the year ending 31 December 2010.
ii) A proforma statement of financial position as at 31 December 2010.
Date posted:
May 5, 2022
.
Answers (1)
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The following statement of financial position was extracted from the books of XYZ Ltd. for the year ended 31 March 2011 and 31 March 2012.
(Solved)
The following statement of financial position was extracted from the books of XYZ Ltd. for the year ended 31 March 2011 and 31 March 2012.
Date posted:
May 5, 2022
.
Answers (1)
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The current credit terms of Fredcom Ltd. are 2/15- net 45 days. The company's total annual sales are Sh.200 million with an average collection period...
(Solved)
The current credit terms of Fredcom Ltd. are 2/15- net 45 days. The company's total annual sales are Sh.200 million with an average collection period of 30 days. Variable cost is 80% of the annual sales. 50% of customers take advantage of the current discount. The company is considering relaxing its discount terms to 3/15 net 45 days. This relaxation of discount terms is expected to increase annual sales by Sh.10 million, reduce average collection period to 27 days and increase the proportion of customers who will take advantage of the discount to 60%. The company's cost of capital is 12%.
Corporate tax rate is 30%.
Assume 360 days in a year.
Required:
Advise the management of Fredcom Ltd. on whether to relax its discount terms.
Date posted:
April 28, 2022
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Answers (1)
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The board of directors of Rand Mills Limited have requested you to prepare a statement showing the working capital requirements for a level of activity...
(Solved)
The board of directors of Rand Mills Limited have requested you to prepare a statement showing the working capital requirements for a level of activity of 30,000 units of output for the year.
The cost structure for the company's product for the above mentioned activity level is given below:
Additional information:
1. Past experience indicates that raw materials are held in stock on average for 2 months.
2. Work in progress (100% complete in regard to materials and 50% for labour and overheads) will
be half a month's production.
3. Finished goods are in stock on average for 1 month.
4. Credit allowed to suppliers is 1 month.
5. Credit allowed to debtors is 2 months.
6. A minimum cash balance of Sh.250, 000 is expected to be maintained.
Required:
Prepare a statement of working capital requirements.
Date posted:
April 26, 2022
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Answers (1)
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Wanga Ltd. maintains a minimum cash balance of Sh. 1,500,000. The standard deviation of the daily cash is Sh.800, 000. The annual interest rate is...
(Solved)
Wanga Ltd. maintains a minimum cash balance of Sh. 1,500,000. The standard deviation of the daily cash is Sh.800, 000. The annual interest rate is 12%. The transaction cost of buying and selling of marketable securities is Sh.200 per transaction. Assume
that one year has 365 days.
Required:
Using the Miller-Orr cash management model, determine:
i) The return point.
ii) Average cash balance.
iii) The upper cash limit.
Date posted:
April 26, 2022
.
Answers (1)
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Discuss the conflicts that might arise among the objectives of working capital management.
(Solved)
Discuss the conflicts that might arise among the objectives of working capital management.
Date posted:
April 26, 2022
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Answers (1)
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Aruna Ltd. is evaluating an investment project which requires the importation of a new machine at a cost of sh. 2,700,000. The machine has a...
(Solved)
Aruna Ltd. is evaluating an investment project which requires the importation of a new machine at a cost of sh. 2,700,000. The machine has a useful life of six years.
Date posted:
April 25, 2022
.
Answers (1)
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Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model...
(Solved)
Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model is expected to increase output. The existing machine had cost sh. 32,000 and was being depreciated using the straight – line method over ten years. The current market value of the existing machine is sh. 15,000.
Bram Ltd. is considering the acquisition of the advanced model which costs sh. 123,500 including installation costs and has a salvage value of sh. 20,500 at the end of 8 years of its useful life. The following data has been provided:
The required rate of return is 15%. Ignore taxation.
Required:
Compute the following in respect of the new machine:
i. Payback period.
ii. Net present Value (NPV).
iii. Internal rate of return (IRR).
Date posted:
April 25, 2022
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Answers (1)