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(1) Desire for Current Income: Some investors like old persons, widow's etc. desire to get
stable current income to meet their living expenses. They invest their savings in shares with
a view to get regular income for their living. If they get low dividend, they would be
compelled to sell some of their shares to meet their living expenses. So they would prefer to
invest in shares of those companies which pay regular and stable dividend and would be
prepared to pay a little high price for shares of such companies.
(2) Removes Investors' Uncertainty: The stable dividend policy removes uncertainty in
investors' mind about dividend payment. Even if the earnings of the company decline and
the company continues to pay the constant amount of dividend, it would indicate that the
management views the bright future prospects for the company. Thus, the changes or no
changes in dividends work as a source of information about firm's profitability.
(3) Additional Finance: The credit standing and prestige of the company paying stable
dividend increases in the eyes of the investors. When the company wants to raise additional
finance, investors would be willing to buy its shares or debentures. Particularly, small
investors requiring regular income would like to invest their savings in shares of companies
paying stable dividends. Even the preference shares and debentures of such companies
would be easily subscribed, as the investors feel that such company would pay regular
interest or dividend.
(4) Ploughing back of Profits: A company paying a reasonable proportion of stable dividend is
able to retain good amount of profit with it, which it can plough back in the business. It is
not compelled to resort to external financing for expansion purposes. The well-known large
companies follow this stable dividend policy with great care and caution. Hence, they can
use their retained earnings for future expansion.
(5) Stable Share Prices: A company paying regular and stable dividend has a high credit
standing in the financial market and its share values remain at a high level. Besides share
prices remain stable over a period of time and do not fluctuate violently as in case of other
speculative shares.
(6) Leads to Management Efficiency: As stable dividend policy implies regular payment of
dividend, the company has to earn profits every year which makes management more
conscious towards their duties. This would lead to more efficient management
Kavungya answered the question on May 5, 2022 at 13:45
- MCC Enterprises Ltd. expects its earnings before interest and taxes (EBIT) to fluctuate with the economic environment as shown below. You are advised that the...(Solved)
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Date posted: May 5, 2022. Answers (1)
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Date posted: May 5, 2022. Answers (1)
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Date posted: May 5, 2022. Answers (1)
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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 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. 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 year. The current market price of the share is sh. 160 with 15% earnings yield.
Required:
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ii. Dividend cover.
iii. Price – earnings ratio.
Date posted: May 5, 2022. Answers (1)
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Date posted: May 5, 2022. Answers (1)
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Date posted: May 5, 2022. Answers (1)
- The following data was obtained from the financial statements of Nemax Ltd. for the year ended 30 September 2013:
Required:
Using the Lintner's model, determine the dividend...(Solved)
The following data was obtained from the financial statements of Nemax Ltd. for the year ended 30 September 2013:
Required:
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Date posted: May 5, 2022. Answers (1)
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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. Answers (1)
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Date posted: May 5, 2022. Answers (1)
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Date posted: May 5, 2022. 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., 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. Answers (1)
- 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. Answers (1)
- Madawa Chemicals Ltd. is in the process of forecasting its financial needs for the coming year ending 31 October 2003. The company attained a turnover...(Solved)
Madawa Chemicals Ltd. is in the process of forecasting its financial needs for the coming year ending 31 October 2003. The company attained a turnover ofSh.300 million for the current year ended 31 October 2002.
The following are the summarized financial statements of the company for the year ended 31 October 2001:
From past experience, it has been disclosed that each additional Sh.1 of sales made by the company
requires, on average, a total investment in fixed assets, stocks and debtors of Sh.1.50. The Sh.1
additional sales also results in the generation of automatic financing of 40 cents as various creditors
spontaneously arise with the increase in sales.
The net profit margin after tax and the dividends payout ratio which apply for the year ended 31
October 2002 will also be relevant into the foreseeable future.
Required:
a) The amount of external finance that will be needed during the year ending 31 October
2003 if sales are expected to increase by 15% in the year.
b) The maximum expected sales growth that can be achieved in the year ending 31
October 2003 if only internally generated funds are used.
(c) The maximum growth in sales that can be achieved in the year ending 31 October 2003 if the
company wishes to maintain its current level of financial gearing.
(d) Briefly comment upon the weaknesses of the method of forecasting used above.
Date posted: May 5, 2022. Answers (1)
- 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. Answers (1)
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Pokea Cellphone Operators Ltd. started operations on 1 September 2002. The company raised the required equity capital of Sh.65million and debt at an annual rate of interest of 18% before commencing business. Given below are some statistics extracted from the books of the company in respect to the financial statements prepared to 31 August 2003
Required:
a) In respect of the year ended 31 August 2003, you are required to prepare the company’s:
i) Trading Profit and Loss account
ii) Balance Sheet
b) The following statistics have been provided with respect to the industry in which the company operates:
Acid test ratio 1.2:1
Return on equity 21%
Capital gearing ratio 36%
Required:
Comment on the performance of the company relative to these industry statistics
Date posted: May 5, 2022. Answers (1)
- Ushindi Limited presented the following financial statements on 30 June 2004
Additional Information
1. An analysis of the industry in which the company operates reveals the following...(Solved)
Ushindi Limited presented the following financial statements on 30 June 2004
Additional Information
1. An analysis of the industry in which the company operates reveals the following industrial
average
Current Ratio 1:5:1
Quick Ratio 0:8:1
2. The purchases for the year were Sh. 2,160,000 while the cost of sales was Sh. 3,000,000.
3. The market price of the company’s shares as at 30 June 2004 was Sh. 5
Required:
a) Compute the following ratios for Ushindi Limited
i) Return on capital employed
ii) Turnover of capital
iii) Operating expenses ratio
iv) Accounts receivable turnover in days
v) Dividend yield
vi) Price earnings ration
vii) Market value to book value ration
viii) Current ratio
b) Compare the company’s liquidity performance with that of the industry.
Date posted: May 5, 2022. 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 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. Answers (1)
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The following is an extract of the balance sheet of Shauri Moyo limited as at 31 December 2005
Date posted: May 5, 2022. Answers (1)