Question 4: Dividend Policy (a) Dividend policy and the discounted dividend growth model. Note that this model has a number of different names (for instance, Gordon growth model and discounted dividend model). Required: Write a short paragraph and provide any relevant diagram to demonstrate, using the discounted dividend growth model, how the Miller and Modigliani theory of dividend irrelevance operates on the model's variables if the dividend payout ratio is increased. (4 marks) (a) Wallaby Ltd is planning on paying a dividend of $2.00 per share. The cum-div share price is $16 and this falls to $14.50 on the ex-div day. Investors face a tax rate of 40% on dividend income and on capital gains; but 20 percent of Wallaby's shareholding is by corporate investors which are exempted from paying tax on dividends. The cost of equity with respect to the firm is 12%. Required: How long (in years to two decimal places) do Wallaby Ltd's investors hold on to their shares, on average, before collecting their capital gains? (6 marks) TOTAL: 10 MARKS Question 4: Dividend Policy (a) Dividend policy and the discounted dividend growth model. Note that this model has a number of different names (for instance, Gordon growth model and discounted dividend model). Required: Write a short paragraph and provide any relevant diagram to demonstrate, using the discounted dividend growth model, how the Miller and Modigliani theory of dividend irrelevance operates on the model's variables if the dividend payout ratio is increased. (4 marks) Question 4: Dividend Policy (a) Dividend policy and the discounted dividend growth model. Note that this model has a number of different names (for instance, Gordon growth model and discounted dividend model). Required: Write a short paragraph and provide any relevant diagram to demonstrate, using the discounted dividend growth model, how the Miller and Modigliani theory of dividend irrelevance operates on the model's variables if the dividend payout ratio is increased. (4 marks) (a) Wallaby Ltd is planning on paying a dividend of $2.00 per share. The cum-div share price is $16 and this falls to $14.50 on the ex-div day. Investors face a tax rate of 40% on dividend income and on capital gains; but 20 percent of Wallaby's shareholding is by corporate investors which are exempted from paying tax on dividends. The cost of equity with respect to the firm is 12%. Required: How long (in years to two decimal places) do Wallaby Ltd's investors hold on to their shares, on average, before collecting their capital gains? (6 marks) TOTAL: 10 MARKS Question 4: Dividend Policy (a) Dividend policy and the discounted dividend growth model. Note that this model has a number of different names (for instance, Gordon growth model and discounted dividend model). Required: Write a short paragraph and provide any relevant diagram to demonstrate, using the discounted dividend growth model, how the Miller and Modigliani theory of dividend irrelevance operates on the model's variables if the dividend payout ratio is increased. (4 marks)
