The DestitutusVentis Company (DV Co) has the following items on its balance sheet (question mark means that the quantity is unknown) Type of asset liability Market value Risk (beta) Cash holdings 20m 0 Fixed investments 180m Short term debt 10m 0 Long term debt 70m 0 05 Equity 120m 1 1 The risk free rate is 3 , and the average return on the market index is 7 The number of shares outstanding for DV Co is 100m The corporate and investor tax rates are zero Modigliani Miller irrelevance of dividend policy and capital structure holds What is the weighted average cost of capital (WACC) for DV Co (5 marks) The company plans to pay a dividend per share of 0 10, which is funded by increasing the companys long term debt correspondingly The new debt has the same beta as the old long term debt What is the value per share of the DV Cos stock on ex dividend day if the dividend payment goes ahead (10 marks) What is the beta of the equity on ex dividend day Explain (15 marks) Outline the leading theories on payout policy irrelevance theory, theories based on asymmetric information, and theories on taxes and transaction costs (20 marks)

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Posted on Oct 02, 2024

The DestitutusVentis Company (DV Co) has the following items on its balance sheet (question mark means that the quantity is unknown): Type of asset/liability Market

The DestitutusVentis Company (DV Co) has the following items on its balance sheet (question mark means that the quantity is unknown):

Type of asset/liability	Market value	Risk (beta)
Cash holdings	20m	0
Fixed investments	180m	?
Short term debt	10m	0
Long term debt	70m	0.05
Equity	120m	1.1

The risk-free rate is 3%, and the average return on the market index is 7%. The number of shares outstanding for DV Co is 100m. The corporate and investor tax rates are zero. Modigliani-Miller irrelevance of dividend policy and capital structure holds.

What is the weighted average cost of capital (WACC) for DV Co?

(5 marks)

The company plans to pay a dividend per share of 0.10, which is funded by increasing the companys long-term debt correspondingly. The new debt has the same beta as the old long-term debt. What is the value per share of the DV Cos stock on ex-dividend day if the dividend payment goes ahead?

(10 marks)

What is the beta of the equity on ex-dividend day? Explain.

(15 marks)

Outline the leading theories on payout policy: irrelevance theory, theories based on asymmetric information, and theories on taxes and transaction costs.

(20 marks)