Question one:

Mountain plc is a quoted company with a year end of 31 December. The directorshave traditionally published the financial statements in the second week of Februaryfollowing the year end and have always announced the dividend for the year alongsidethe publication of the financial statements. Mountain plc's dividend has grown by between 3% and 5% each year for the pasteight years.

During September 2016 the directors updated their projections of Mountain plc'sfinancial position. They realised that it would probably not be prudent to increase thedividend compared to last year. Indeed, it may be desirable to reduce the dividend by5% compared to that for the year ended 31 December 2015.

Mountain plc continues to be profitable. However, a large loan has been negotiated inorder to fund expansion. If the market's expectations concerning the dividend for theyear ended 31 December 2016 are met then the company's projected gearing ratio willbe at the upper limits of the terms specified by the lender. The directors themselveswould be uncomfortable with a gearing ratio that was that high.

The directors are debating the best way to address the question of the dividend. Threesuggestions have been made:

? Announce the expected reduction in dividend immediately (i.e. in September

2016) with a clear explanation of the reasons.

? Wait and announce the reduced dividend, again with an explanation of the reasons,at the publication of the financial statements (i.e. in February 2017).

? Maintain the dividend growth, but organise a rights issue in order to ensure thatthere is sufficient equity to maintain the gearing ratio at an acceptable level.

(i) Explain why both the lender and Mountain plc's directors would wish to set anupper limit for the company's gearing ratio. [8marks]

(ii) Discuss the advantages and disadvantages of announcing the proposedreduction in the dividend in September 2016 or in February 2017. [6marks]

(iii) Discuss the advantages and disadvantages of conducting a rights issue to raiseequity in order to continue the trend of dividend growth [6marks]

[Total 20marks]

Question two:

Maxine, aged 60, buys an endowment assurance from Company ABC with a term of five years. The sum assured is $25,000, payable at the end of the five years or at the end of the year of death if earlier. Premiums are payable annually in advance throughout the term of the policy. Company ABC assumes that initial expenses will be $200, and renewal expenses, which are incurred at the beginning of the second and subsequent years of the policy, will be f20 plus 2.5% of the premium. The funds invested for the policy are expected to earn 7% pa, and mortality is expected to follow the AM92 Select life table. Company ABC holds net premium reserves, calculated using AM92 Ultimate mortality and interest of 4% pa. Company ABC sets premiums so that the net present value of the profit on the contract is 10% of the annual premium, using a risk discount rate of 12% pa. (i) Calculate Maxine's annual premium. [15] Without carrying out any further calculations, state with brief reasons what the effect on the premium would be in each of the following cases: (a) The reserves are calculated using a lower rate of interest. (b) The office uses a risk discount rate of 15%. (c) Mortality is assumed to be AM92 Ultimate. [6] [Total 21]