Question 1 – Dividend Policy Deciding how much earnings to retain and how much to return to ordinary shareholders is a key part of dividend policy. Drawing on the dividend policy literature critically discuss some of the factors that need to be considered by senior managers of a listed company when deciding on: a) the size of the annual dividend to return to its shareholders (12 marks) b) and the practical issues that need to be considered when deciding on (12 marks) the size of the dividend payment. Squeezeco is currently deciding on the level and form of its next dividend. It is considering three options: i. A cash dividend payment of 15p per share ii. A 5% scrip dividend iii. A repurchase of 15 % of ordinary share capital at the current market price Extracts form the company’s financial statements are given below £m £m Operating profit 24.5 Taxation 7.8 Distributable earnings 16.7 Non-current assets 75 Current Assets Trade receivables 27 Inventory 24 Cash 46 97 Total Assets 172 Equity Finance Ordinary Shares (50p) 26 Reserves 108 134 Current Liabilities 38 Total liabilities 172 c) If the current cum dividend share price is 432p, calculate the (16 marks) effect of the three options on the wealth of a shareholder owning 1250 shares in Squeezeco. d) Critically discuss how the company’s decision will be influenced by the (10 marks) opportunity to invest £70m in a project with a positive net present value. Total (50 marks) Question 2 – Mergers and Takeovers The managing directors of Aztec are considering what value to place on Trojan plc, a company that they are planning to take near in the near future. Aztec’s plc’s share price is currently £3.89 and the company’s earning per share stand at 21p. Aztec’s weighted average cost of capital is 9%. The board estimates that annual after tax synergy benefits resulting form the takeover will be £4.35m, that Trojans’ distributable earnings will grow at an annual rate of 2% and that duplication will allow the sale of the £21m of assets, net of corporate tax (currently standing at 20%), in a years time. Information relating to Trojan plc.: Financial Statement of Trojan plc £m Non-current assets 270 Current assets 56 Total assets 326 Equity Ordinary Shares (£1) 147 Reserves 64 211 7% bonds 72 Current liabilities 43 Total liabilities 326 Statement of profit or loss extracts £m Profit before interest and tax 64.0 Interest payments 6.5 Profit before tax 57.5 Taxation 17.1 Distributable earnings 40.4 Other information: Current ex-div share price £2.05 Latest dividend payment 13p Past four years dividends payment 10p, 10.5p, 11p, 12p Trojan’s equity beta 1.1 % Treasury bill yield 5% Return on the market 11% Given the above information calculate the value of Trojan plc using the following valuation methods: a) Price/earnings ratio (10 marks) b) Dividend valuation method (10 marks) c) Discounted cash flow method (10 marks) d) Drawing on the mergers and takeovers literature, critically discuss (20 marks) the problems associated with using the above valuation techniques and based on this which of the above you would recommend the board of Aztec to use. Question 3 Lovewell Limited a food manufacturer is considering purchasing a new machine for £275,000. The company is expecting an annual cash inflow of £85,000 from the sale of products and an annual cash outflow of £12,500 for each of the six years of the machine’s useful life. The annual cash outflows do not include annual depreciation charges for the machine. The machine is depreciated using the straight –line method. The machine is expected to last for six years, with a residual value estimated to be at the rate of 15% of the original cost of the machine. The cost of capital for Lovewell Limited is 12%. You are required to: 1. Calculate using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine: a. The Payback Period. b. The Accounting Rate of Return. c. The Net Present Value. d. The Internal Rate of Return (to two decimal places) (20 marks) 2. Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques. (30 marks) Table 1 Applied Penalties for Exceeding the word count. Word limit Penalty Actual Word Count Exceeds limit by up to 10% No penalty – tolerance band (see below) 3300 Exceeds limit by 10.1-20% -5% 3301 – 3600 Exceeds limit by 20.1-30% -10 % 3601 – 3900 Exceeds limit by 30.1-40% -15 % 3901 – 4200 Exceeds limit by 40.1-50% -20 % 4201 – 4500 Exceeds limit by more than 50% Mark of zero 4501+ The learning outcomes for this module assessed by this piece of work are:

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