Q5:

(A) Assume perfect capital markets, and consider the following information about bKash Mobilea leading mobile money service provider in India. bKash has assets with a market value of Rs. 300 million, Rs.50 million of which are in cash. It has debt of Rs. 100 million, and 10 million shares outstanding. The top management of bKash is divided in their opinion. One group wants to distribute dividends to the shareholders using all cash. The other group prefers share repurchases. Which group will you support and why? You need to show all calculations to support your answer. (3 marks)

(B) Modigliani and Miller argue that a firms dividend policy does not affect the value of the firm if the capital market is perfect. Why? (1 mark)

(C) What is the main problem with the regular dividend policy from a firms point of view What is the main problem with a constant payout ratio dividend policy from a shareholders point of view? (1 mark)