Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 5 (this question has four parts a), b), c) and d) _(20 marks) Part a Suppose management of Lilydale Sports Corporation decides to use

image text in transcribed

Question 5 (this question has four parts a), b), c) and d) _(20 marks) Part a 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. (5 marks) Part b. Deakin 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? (5 marks) Part c. Explain the likely effects on dividend-payout ratios of each of the followings. a) Interest rates increase substantially; b) Company profitability increases; c) Prospectus requirements are tightened, increasing the cost of share issue; d) Personal income (but not capital gains) tax are increased; (6 marks) Part c. The imputation system encourages payment of high dividend. Companies that pay significant dividend may be left short of cash. Comment on this statement. (4 marks) Question 5 (this question has four parts a), b), c) and d) _(20 marks) Part a 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. (5 marks) Part b. Deakin 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? (5 marks) Part c. Explain the likely effects on dividend-payout ratios of each of the followings. a) Interest rates increase substantially; b) Company profitability increases; c) Prospectus requirements are tightened, increasing the cost of share issue; d) Personal income (but not capital gains) tax are increased; (6 marks) Part c. The imputation system encourages payment of high dividend. Companies that pay significant dividend may be left short of cash. Comment on this statement. (4 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Dark Side Of Valuation

Authors: Aswath Damodaran

2nd Edition

0137126891, 9780137126897

More Books

Students also viewed these Finance questions