SECTION B a) In the 2020 accounting year, i The board of directors of some manufacturing and services companies decided to pay stock dividends instead of cash dividends. ii. On the other hand, the board of directors of majority of companies within the ICT industry decided to pay special cash dividends. in It was also observed that some the management of some companies had decided to repurchase shares while others were engaging in stock splits. a. What could be the reason for these decisions and choice of dividend payments by the boards of these companies? b. What do you think will be the effect of such decisions on the outstanding number of shares and the share prices of these companies b) Mr. Armstrong and Mr. Spendwell are both investors looking to buy financial assets. Mr. Armstrong prefers assets with the lowest prices while Mr. Spendwell Page 3 of 6 prefers assets on the financial market with higher prices. Each of them currently has GHC 1000 to invest and needs your assistance to know which asset to buy to suit their preference. Do well to assist Mr. Armstrong and Mr. Spendwell to make a decision using the following information below, i Asset A is a bond with a coupon rate of 10% and pays semiannual coupons. The par value is GHC 1,000, and the bond has 5 years to maturity. The yield to maturity is 11% Asset Bis a stock whose dividend is expected to increase by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. The last dividend was GHC 100 and the required return is 20%. iii. Asset is an annuity which requires one to deposit GHC 30 at the end of each month for three (3) years caming 12% compounded monthly c) It turns out that Mr. Armstrong is a risk-averse investor while Mr. Spendwell has a huge risk appetite. After receiving a huge bonus from their employers they both decided to do more investments. Of course, Mr. Armstrong has indicated his preference for low risk assets while Mr. Spendwell also indicated his preference more very high risk assets that offer a high retum, given his knowledge in risk and retum. i Using the following information below, do well to advice these two investors on which asset to invest in, considering their risk preference. ii. Mr. Knowitall subsequently advised Mr. Armstrong to rather invest 50% of his money in Asset A and 50% in Asset B. As a finance expert, what will you say about this idea and what figures will you show to Mr. Armstrong to convince him that this is actually the way to go? State 1 2 Probability 20% 30% Retum on Asset A 5% 10% 15% Return on Asset B 50% 30% 10% -10% 4 30
