This question relates to your understanding of dividend policy and you are required to answer both parts.

1. Explain how the dividend imputation system in Australia impacts different dividend clienteles.

2. Discuss which dividend policy is suitable (and why) for a publicly listed software company, with a limited investor base comprising of high net worth investors and foreign investors. The companys flagship product has only been recently developed and released to the market and the firm plans to expand product offering over the upcoming years.

This question relates to exchange rate relationships, currency hedging and international capital budgeting. Answer all four parts.

1. Over the coming year, the inflation rates for the UK and Russia are predicted to be 0.5% and 4% respectively. Given Purchasing Power Parity, determine the expected spot rate at the end of the year and state if the Great Britain Pound (GBP) is expected to appreciate or depreciate against the Russian Ruble (RUB). The current GBP/RUB spot rate is 101.835. (1 mark)

2. Interest rates on 1-year government issues securities for South Korea and Saudi Arabia are currently 1.25% and 2.3%. What is the expected inflation rate over the coming year for Saudi Arabia, based on the International Fisher Effect? The market predicts the South Korean inflation rate to be 1.1%. (1 mark)

3. What is transaction risk? Suggest one way in which a company expecting to receive payment from a foreign customer in four months can hedge against a possible depreciation of the foreign currency. (3 marks)

4. Shandong Group is a Chinese company that wishes to evaluate an investment project in Australia. The capital expenditure is expected to be 920 million Chinese Yuan (CNY). The nominal cash flows over the next 5 years are projected to be: CNY350 million at the end of Year 1, CNY390 million at the end of Year 2, CNY330 million at the end of Year 3, and CNY270 million at the end of Year 4. The AUD/CNY spot rate is 0.2082.

The Chinese interest rate is 2.3% and the Australian interest rate is 1.4%. The company typically applies a 10% required rate of return on domestic investment projects of similar risk but adds a risk premium based on the domestic interest rate for overseas investments.

Discuss if the company should proceed with the investment based on the projects NPV.

(5 marks)

This question relates to capital structure theory and practical implications of capital structure decisions. Answer both parts.

1. Modigliani and Millers Capital Structure Irrelevance Theorem assumes companies do not pay taxes, and there is no risk of default. Explain how these two assumptions do not hold in practice and how this leads to the Static Trade-Off Theory of capital structure. (2 marks)

2. Discuss the possible impact of weakening business and financial conditions due to the COVID-19 pandemic on airlines which is an industry that typically relies on higher levels of leverage. Consider the effects on the borrowing power, possibility of financial distress, and capacity to raise new funding for a company in this type of industry, in the current business and financial climate. (4 marks)