• Legal requirements-they can be classified as follows;-
i. The net profit rule which states that dividends can only be paid from the companies available profits.
ii. Insolvency rule which states that the company cannot pay dividends when its insolvent i.e. when total assets are less than liabilities.
iii. Capital requirement rule which prohibits payment of dividends from capital through sale of assets to raise money to pay dividends.
• Shareholders expectations-if the company shareholders are wealthy, in a high income bracket, they may prefer capital gains over dividends and therefore company may retain more funds.
• Bond covenants-these are terms and conditions of the loan agreement, the restrictions may restrict the company from paying dividends, unless earnings exceed a certain amount.
• Industrial norms – a company will adopt a dividend policy which is similar to its competitors in the industry that it operates.
• Profitability and liquidity position- companies’ ability to pay dividends will be determined by the ability to generate stable profits.
Kavungya answered the question on May 5, 2022 at 13:53
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Outline the reasons that may constrain a company from paying dividends to its shareholders at the end of a financial year.
(Solved)
Outline the reasons that may constrain a company from paying dividends to its shareholders at the end of a financial year.
Date posted:
May 5, 2022
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Answers (1)
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PDS Ltd is a medium sized company quoted on the stock exchange. The company’s year-end is 31 December. The following data relate to the company’s...
(Solved)
PDS Ltd is a medium sized company quoted on the stock exchange. The company’s year-end is 31 December. The following data relate to the company’s earnings per share (EPS) and dividend per share (DPS) for the last five years.
If the current dividend policy is maintained, the directors of PDS Ltd. expect that annual growth in earnings and dividend will be the same as the average growth in earnings over the past four years. PDS Ltd., which is wholly equity financed, is reluctant to obtain debt to finance its growth opportunities. The company is therefore considering a change in its dividend policy where 50% of its earnings will be retained to finance identified projects which are estimated to have an average post-tax
return of 15%.
The company's cost of capital is 12%.
Required;-
The share price of the company which might be expected by the market
(i) If the company does not announce the change of dividend policy.
(ii) If the company announces the change of dividend policy.
Date posted:
May 5, 2022
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Answers (1)
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Explain the arguments in favour of a stable dividend policy.
(Solved)
Explain the arguments in favour of a stable dividend policy.
Date posted:
May 5, 2022
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Answers (1)
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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)
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 earnings distribution is expected to continue in perpetuity. The company has one million shares outstanding and no debt in the capital structure. The company pays all its earnings in dividends and shareholders require a
12% return. The company pays no taxes.
Date posted:
May 5, 2022
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Answers (1)
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Explain three ways in which a company could pay dividends to its shareholders.
(Solved)
Explain three ways in which a company could pay dividends to its shareholders.
Date posted:
May 5, 2022
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Answers (1)
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Enumerate four ways in which the dividend decision affects the wealth maximization goal of a company quoted in the securities exchange of your country.
(Solved)
Enumerate four ways in which the dividend decision affects the wealth maximization goal of a company quoted in the securities exchange of your country.
Date posted:
May 5, 2022
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Answers (1)
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Discuss the effect of the following concepts on the firm's dividend policy:
(i) Clientele effect
(ii) "Homemade" dividend.
(Solved)
Discuss the effect of the following concepts on the firm's dividend policy:
(i) Clientele effect
(ii) "Homemade" dividend.
Date posted:
May 5, 2022
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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...
(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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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:
Using the Lintner's model, determine the dividend per share (DPS) of Nemax Ltd. for the year ended 30 September 2013.
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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Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its financial statements for the last three years are as follows:
(Solved)
Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its financial statements for the last three years are as follows:
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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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
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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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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...
(Solved)
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
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Answers (1)