Q1Calculate the rate of return available to shareholders for a company financing $1 million of assets with the following three arrangements:

a.All equity

b.50% equity, and 50% debt at an interest rate of 12% per annum.

c.25% equity, and 74% debt at an interest rate of 12% per annum.

The assets are expected to generate earnings before interest of $150,000 per annum in perpetuity.

Q2

Suppose management of Lilydale Sports Corporation decides to use cash to pay a dividend of $8,000,000, and then issues more shares to new shareholders to replace the cash. What will happen to the market value of the existing shares and shareholders' wealth? Explain your answer clearly.

Q3

Apple Ltd has announced a fully franked dividend of $1 per share. The company tax rate is 27.5 per cent. By how much should the share price fall on the ex-dividend date, if franking credits are fully valued?