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QUESTION 4 [30 MARKS] Oscar plc The directors of Oscar plc are considering opening a factory to manufacture a new product. Detailed forecasts of the product's expected cash flows have been made, and it is estimated that an initial investment of 2.5 million is required. During the last 5 years the number of shares (equity) in issue has remained constant at 3 million, and the market price per share (current ex-div. price per ordinary share) at 31 December 2011 is 135p. The company pays only one dividend each year (on 31 December) and dividends for the last 5 years have been as follows. Year Dividend per share (pence) 2007 2008 2009 2010 2011 10.0 10.8 11.6 13.6 13.6 The company also has outstanding a 900,000 bank loan repayable on 31 December 2019. The rate of interest on this debt is variable, currently at 16.5%. REQUIRED (a) Calculate the weighted average cost of capital (WACC) for Oscar plc as at 31 December 2011. (For calculation of cost of equity, Ke, you may make reference to the formula sheet - page 16) [10 Marks] (b) Explain to the directors of Oscar plc what assumptions they are making if the WACC calculation in part 1 above is used to discount the expected cash flows of the project. [5 marks] (c) Critically analyse the different Dividend policies and their implications on equity holders. You are expected to make reference to the different relevant Dividend policy theories. [15 marks] Page 15 of 17 QUESTION 4 [30 MARKS] Oscar plc The directors of Oscar plc are considering opening a factory to manufacture a new product. Detailed forecasts of the product's expected cash flows have been made, and it is estimated that an initial investment of 2.5 million is required. During the last 5 years the number of shares (equity) in issue has remained constant at 3 million, and the market price per share (current ex-div. price per ordinary share) at 31 December 2011 is 135p. The company pays only one dividend each year (on 31 December) and dividends for the last 5 years have been as follows. Year Dividend per share (pence) 2007 2008 2009 2010 2011 10.0 10.8 11.6 13.6 13.6 The company also has outstanding a 900,000 bank loan repayable on 31 December 2019. The rate of interest on this debt is variable, currently at 16.5%. REQUIRED (a) Calculate the weighted average cost of capital (WACC) for Oscar plc as at 31 December 2011. (For calculation of cost of equity, Ke, you may make reference to the formula sheet - page 16) [10 Marks] (b) Explain to the directors of Oscar plc what assumptions they are making if the WACC calculation in part 1 above is used to discount the expected cash flows of the project. [5 marks] (c) Critically analyse the different Dividend policies and their implications on equity holders. You are expected to make reference to the different relevant Dividend policy theories. [15 marks] Page 15 of 17