Question two

Goodle Company Ltd currently has outstanding $30,000$ shares selling at shs $1,000$ each. The firm

is anticipating the declaration of dividend of shs $60$ per share at the end of the current financial

year. The company expects to have a net income of shs$.3,000,000$ and a proposal for making

new investments of shs $6,000,000.$ The Company belongs to a risk class for which the appropriate

capitalization rate is $12\%.$

$($a$)$Discuss the dividend irrelevance theory using the Modigliani and Miller $($MM$)$ approach

$(8$ marks$)$

$($b$)$ Under Modigliani and Miller $($MM$)$ assumptions you are required

$($i$)$To calculate the number of new shares to be issued if dividend is paid and if dividend is not

paid

$($ii$)$To calculate the market value of firm at the end of the year if dividend is paid and if dividend

is not paid

$($iii$)$ Explain the answer obtained in part $($i$)$ and part $($ii$)$ above

$(2$ marks$)$