For this question, i have attached the commentaries/answers. However, i do not understand Qn2 (e). I would require a detailed explanation/answer and working to qn 2(e). Thank you so much!

Question 2 (a) i. Explain the key findings (stylised facts) of John Lintner's empirical study of firms dividend policies. To what extent do these findings suggest dividend payments signal information to the market? (9 marks) ii. A firm with annual earnings per share of 5 and a target payout ratio of 50% has just made a dividend payment of 2.50. Assume that next year's earnings per share will increase to 7 and this will remain constant in the future. Using Lintner's partial adjustment model, determine the dividend that will be paid in two years' time, assuming a smoothing parameter of 0.7. (4 marks) (b) You own 100 shares in the firm Alfa. The current share price is 110 and the earnings per share is 0.70. Assume there are no capital market imperfections and that Alfa's annual earnings will remain constant in future. Alfa pays out all of its earnings each year as dividends. You prefer to invest your money in the firm, so you reinvest each year's dividend in the firm by buying more of its shares. Your investment horizon is 10 years. i. What is the value of your investment after 10 years? What would the value of your investment have been, if Alfa's policy was a zero dividend payout over the same period? (4 marks) (4 marks) (b) You own 100 shares in the firm Alfa. The current share price is 10 and the earnings per share is 0.70. Assume there are no capital market imperfections and that Alfa's annual earnings will remain constant in future. Alfa pays out all of its earnings each year as dividends. You prefer to invest your money in the firm, so you reinvest each year's dividend in the firm by buying more of its shares. Your investment horizon is 10 years. 1. What is the value of your investment after 10 years? What would the value of your investment have been, if Alfa's policy was a zero dividend payout over the same period? (4 marks) Assume now that there are personal taxes but no other market imperfections. The tax rate on both dividends and capital gains is 30%. ii. Assume again that Alfa pays out all its earnings as dividends. You reinvest all your dividends back in the firm but decide to sell your shares at your 10 year investment horizon, immediately after the last dividend was paid. What is the value of your wealth? (3 marks) ill. What would be your answer in (il), assuming now that Alla's policy was a zero dividend payout over the 10 years? Is it different? Why/ why not? (5 marks) Reading for this question Subject guide, Chapter 7. Approaching the question (a) i. There are four stylised facts: managers seem to have a target dividend payout level the payout level is determined as a percentage of sustainable earnings per share managers are more concerned with changes in dividends rather than the actual level of dividends managers prefer not to make dividend changes which might need to be reversed. Lintner's findings show that firms try to smooth their dividend changes over time. This is consistent with the concept that managers are better informed than outsiders about the firm's performance and prospects and that dividends convey information to the market, in a similar way to the signalling role of debt in the theory of Ross (1977). Event studies show that dividend cuts can lead to share price drops which managers wish to avoid ii. Lintner's partial adjustment model: AD, EPS-D-1) for 0