Question 4 Walker plc is fully financed by 26 million equity shares with a current (cum dm) market value of 4 each The current dividend of 20 65 is about to be paid The dividend was 0.63 per share one year ago and E0 6125 per share two years ago The finance director of Walker has proposed that the firm invests F 16 9 million now in technologically updated equipment which will save the firm 4 665 million per year in perpetuity. The first saving will occur in one year. The funds for investment will be available if the firm does not pay the current dividend (dividends will restart in one year at 0.65(1+g) per share, where g is the average dividend growth rate) Alternatively, Walker could raise external finance through a rights issue The market is semi-strong form efficient and there are no taxes (a) Estimate the average dividend growth rate for Walker pic and its cost of capital both to the nearest whole percentage point, (5 marks) For questions (b) to (e), assume te dividend growth rate and cost of capital will remain the same in future (b) If the current dividend is not paid, what will be the price per share after project acceptance? (4 marks) (c) If the firm funds the project by a 1 for 4 nights issue priced at 2 60 per share and pays the current dividend, what will be the ex-rights equilibrium price per share? (5 marks) (d) Demonstrate that a shareholder who is concerned only about her wealth and owns 50 shares in Walker before the rights issue, should be indifferent to (0) taking up the rights and receiving a full dividend and (ii) forgoing the current dividend if no rights issue is made. (5 marks) (e) Assume now that there are personal taxes. All income from capital gains is taxed at a rate c, all income from dividends is taxed at a rate d. Assume also that the rates c and d are the same, the inflation rate is zero and that the shareholder in part (d) plans to hold her shares in Walker for another two years and then sell them Does the shareholder remain indifferent between the two methods of financing the new project? Carefully explain your reasoning (6 marks) Question 4 Walker plc is fully financed by 26 million equity shares with a current (cum dm) market value of 4 each The current dividend of 20 65 is about to be paid The dividend was 0.63 per share one year ago and E0 6125 per share two years ago The finance director of Walker has proposed that the firm invests F 16 9 million now in technologically updated equipment which will save the firm 4 665 million per year in perpetuity. The first saving will occur in one year. The funds for investment will be available if the firm does not pay the current dividend (dividends will restart in one year at 0.65(1+g) per share, where g is the average dividend growth rate) Alternatively, Walker could raise external finance through a rights issue The market is semi-strong form efficient and there are no taxes (a) Estimate the average dividend growth rate for Walker pic and its cost of capital both to the nearest whole percentage point, (5 marks) For questions (b) to (e), assume te dividend growth rate and cost of capital will remain the same in future (b) If the current dividend is not paid, what will be the price per share after project acceptance? (4 marks) (c) If the firm funds the project by a 1 for 4 nights issue priced at 2 60 per share and pays the current dividend, what will be the ex-rights equilibrium price per share? (5 marks) (d) Demonstrate that a shareholder who is concerned only about her wealth and owns 50 shares in Walker before the rights issue, should be indifferent to (0) taking up the rights and receiving a full dividend and (ii) forgoing the current dividend if no rights issue is made. (5 marks) (e) Assume now that there are personal taxes. All income from capital gains is taxed at a rate c, all income from dividends is taxed at a rate d. Assume also that the rates c and d are the same, the inflation rate is zero and that the shareholder in part (d) plans to hold her shares in Walker for another two years and then sell them Does the shareholder remain indifferent between the two methods of financing the new project? Carefully explain your reasoning (6 marks)