Zippy Co has 1,000,000 issued ordinary shares which are traded in an efficient capital market. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Zippy Co has 1,000,000 issued ordinary shares which are traded in an efficient capital market. The company has just paid dividend of $0.50 per share in 2019. Recent dividends paid by the company are as follows: Year Dividend per share (b) (c) 2015 0.411 Zippy Co has cost of equity of 12%. The company pays corporate tax of 25% per year. The board of directors has just approved Zippy Co to set up a medium-term note programme to explore debt issuances. The share price of Zippy Co increases by 5% within 10 minutes of the announcement on the stock exchange. Zippy Co's Finance team has received the latest indicative yields for risk-free assets: 3 months 1 year 2.00% 2.25% Period Yield (d) 2016 0.432 (c) 2017 0.454 2018 0.476 3 years 1.75% The Finance team is considering whether to recommend issuing (i) 5-year unsecured bonds or (ii) new ordinary shares to fund potential acquisitions as part of the company's business expansion plans. 5 years 1.50% Philip is Zippy Co's group treasurer. He argues for the use of leverage because he believes it will increase the value of the company. He further asserts that Zippy Co should increase its dividend payout ratio in order to reward its existing shareholders as he is convinced that every investor would welcome more dividends. 2019 0.500 10 years 1.25% Explain one (1) limitation of the constant dividend growth model. Use the constant dividend growth model to determine the market value of each ordinary share. Apply the Efficient Market Hypothesis to infer the form of market efficiency for the trading of Zippy Co's shares. Analyse the term structure of the yield curve for the risk-free assets. Briefly discuss two (2) reasons for someone to invest in Zippy Co's unsecured bonds over the company's ordinary shares. (g) Discuss the assumptions made by Philip and whether his statement on using leverage to increase firm value is valid. (5 marks) Critically evaluate Philip's assertion that all investors would welcome high dividend payouts. (6 marks) Zippy Co has 1,000,000 issued ordinary shares which are traded in an efficient capital market. The company has just paid dividend of $0.50 per share in 2019. Recent dividends paid by the company are as follows: Year Dividend per share (b) (c) 2015 0.411 Zippy Co has cost of equity of 12%. The company pays corporate tax of 25% per year. The board of directors has just approved Zippy Co to set up a medium-term note programme to explore debt issuances. The share price of Zippy Co increases by 5% within 10 minutes of the announcement on the stock exchange. Zippy Co's Finance team has received the latest indicative yields for risk-free assets: 3 months 1 year 2.00% 2.25% Period Yield (d) 2016 0.432 (c) 2017 0.454 2018 0.476 3 years 1.75% The Finance team is considering whether to recommend issuing (i) 5-year unsecured bonds or (ii) new ordinary shares to fund potential acquisitions as part of the company's business expansion plans. 5 years 1.50% Philip is Zippy Co's group treasurer. He argues for the use of leverage because he believes it will increase the value of the company. He further asserts that Zippy Co should increase its dividend payout ratio in order to reward its existing shareholders as he is convinced that every investor would welcome more dividends. 2019 0.500 10 years 1.25% Explain one (1) limitation of the constant dividend growth model. Use the constant dividend growth model to determine the market value of each ordinary share. Apply the Efficient Market Hypothesis to infer the form of market efficiency for the trading of Zippy Co's shares. Analyse the term structure of the yield curve for the risk-free assets. Briefly discuss two (2) reasons for someone to invest in Zippy Co's unsecured bonds over the company's ordinary shares. (g) Discuss the assumptions made by Philip and whether his statement on using leverage to increase firm value is valid. (5 marks) Critically evaluate Philip's assertion that all investors would welcome high dividend payouts. (6 marks)
Expert Answer:
Answer rating: 100% (QA)
a The constant dividend growth model also known as the Gordon Growth Model can be used to determine the market value of each ordinary share The formula is Market Value per Share D1 r g Where D1 Expect... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
Posted Date:
Students also viewed these accounting questions
-
What are essential to resolving conflicts and to organizational effectiveness.?
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Julio sold his corporation to a competitor, Exeter LLC, for $100,000,000. Julio incorporated his business 17 years ago by investing $500,000 plus his proprietary know-how. There have been no other...
-
As it describes an elliptic orbit about the sun, a spacecraft reaches a maximum distance of 325 106 km from the center of the sun at point A (called the aphelion) and a minimum distance of 148 106...
-
Environmental Concerns Limited (ECL) issued \$500,000 of 10-year, 6\% bonds payable at maturity (par) value on May 1, 2008. The bonds pay interest each April 30 and October 31, and the company ends...
-
M. Beall Inc. uses the aging method to estimate the companys bad debt expense. Mike Beall, the president of the company, collected information about the companys outstanding accounts receivable and...
-
The Redford Corporation took out a 20-year mortgage on June 15, 2011, for $2,600,000 and pledged its only manufacturing building and the land on which the building stands as collateral. Each month...
-
Suppose that the 1 - year interest rate is currently 8 % on British pound and 6 % on US dollar. ( a ) If the current ER is $ 1 . 2 5 / , what would be the expected ER one year from now? ( b ) If the...
-
Find RAB in the network in figure. ww- 6 kn 6 kN 2 kn RAB 6 B
-
Gissou is playing a game where metal balls are being rolled across a table. All collisions in this game are one-dimension inelastic collision and there is no resistance on the table. Given the...
-
The formula for kinetic energy is KE= 1/2mv2, where m is mass,and v is velocity. If an object\'s velocity is increased from 2meters/second to 4 m/s, what happen to its KE?
-
If a government expanded its deficit and Ricardian equivalence held, what impact would this have on national income? What assumptions are required for Ricardian equivalence to hold? How plausible do...
-
Helium atomic number is 2, atomic weight is 4.0026amu. How many protons and electrons are in a helium atom? Mass of proton is 1.0007amu, mass of neutron is 1.0008amu. If there are only 2, isotopes of...
-
Compute the cost assigned to ending inventory using fifo, lifo, weighted average, and specific identification. for specific identifications, units sold include 4 5 units from beginning inventory, 1 7...
-
A 2.0-kg object is attached to a 1.5-m long string and swung in a vertical circle at a constant speed of 12 m/s. a. What is the tension in the string when the object is at the bottom of its path? b....
-
List theories of leadership you know and discuss it in the rest of the class.
-
At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for quarterly rent payments of $25,000 each....
-
Mark Ventura has just purchased an annuity to begin payment at the end of 2016 (that is the date of the first payment). Assume it is now the beginning of the year 2014. The annuity is for $8,000 per...
-
Vitale Hair Spray had sales of 13,000 units in March. A 70 percent increase is expected in April. The company will maintain 30 percent of expected unit sales for April in ending inventory . Beginning...
-
Fill in the blank spaces with categories 1 through 7: 1. Balance sheet (BS) 2. Income statement (IS) 3. Current assets (CA) 4. Fixed assets (FA) 5. Current liabilities (CL) 6. Long-term liabilities...
-
Why do you think mandatory job rotation and vacations are effective controls to reduce instances of fraud? In its 2008 Report to the Nation on Occupational Fraud and Abuse, the Association of...
-
Does it surprise you that the audit of ICFR and external audit were ranked at the bottom as effective tools to prevent/detect fraud? Why or why not? In its 2008 Report to the Nation on Occupational...
-
In a 2005 poll sponsored by Wall Street Journal Online and Harris Interactive, 2,061 U.S. investors were asked whether the regulations and costs of SOX were too strict. Overall, 55 percent called the...
Study smarter with the SolutionInn App