Noble plc, a listed company, has for a number of years paid an annual dividend of...

 

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Noble plc, a listed company, has for a number of years paid an annual dividend of 90p per share on its 200,000 ordinary shares, which have a total market value of £930,000 cum div. The next annual dividend of £180,000 is due to be paid within a few days. It is generally expected that the company's dividends will always be at the current level. Noble has no debt capital. The directors of Noble plc are considering an investment project that would involve the immediate investment of £100,000 and would produce net annual receipts of £26,400 indefinitely. The first receipt would arise after one year. Details of the project have not yet been made public. All receipts from the project would be distributed as dividends when received. The directors believe that the project has the same business risk as the current operations of the company. If the project were undertaken, it would be financed in one of two ways: (1) A reduction of £100,000 in the current dividend. (ii) A public issue of ordinary shares; the new shares would rank for dividend one year after issue. Assume that, if the project were accepted, the directors' expectations of future results would be communicated to, and believed by, the stock market, and that the market would perceive the risk of the company to be unaltered. REQUIRED: (a) Estimate the new market price per ordinary share, ex div, if the project is accepted and financed by a reduction in the current dividend. (b) At (a) above all of the gains from the project went to the old shareholders. Calculate the price at which new shares would be issued, the number of new shares to be issued and the new future dividend per share under financing option (ii) above, assuming that the benefit from the project is to go to the existing shareholders. (c) Under the MM dividend irrelevancy proposition the method of financing the new investment shouldn't matter to the shareholders. Show that this is the case employing the example of a holder of 100 existing shares in Noble. (d) Discuss the relative merits of each of the two sources of equity finance in practice. (Ignore issue costs of new shares and taxes in parts (a) to (c), but not in part (d)) Noble plc, a listed company, has for a number of years paid an annual dividend of 90p per share on its 200,000 ordinary shares, which have a total market value of £930,000 cum div. The next annual dividend of £180,000 is due to be paid within a few days. It is generally expected that the company's dividends will always be at the current level. Noble has no debt capital. The directors of Noble plc are considering an investment project that would involve the immediate investment of £100,000 and would produce net annual receipts of £26,400 indefinitely. The first receipt would arise after one year. Details of the project have not yet been made public. All receipts from the project would be distributed as dividends when received. The directors believe that the project has the same business risk as the current operations of the company. If the project were undertaken, it would be financed in one of two ways: (1) A reduction of £100,000 in the current dividend. (ii) A public issue of ordinary shares; the new shares would rank for dividend one year after issue. Assume that, if the project were accepted, the directors' expectations of future results would be communicated to, and believed by, the stock market, and that the market would perceive the risk of the company to be unaltered. REQUIRED: (a) Estimate the new market price per ordinary share, ex div, if the project is accepted and financed by a reduction in the current dividend. (b) At (a) above all of the gains from the project went to the old shareholders. Calculate the price at which new shares would be issued, the number of new shares to be issued and the new future dividend per share under financing option (ii) above, assuming that the benefit from the project is to go to the existing shareholders. (c) Under the MM dividend irrelevancy proposition the method of financing the new investment shouldn't matter to the shareholders. Show that this is the case employing the example of a holder of 100 existing shares in Noble. (d) Discuss the relative merits of each of the two sources of equity finance in practice. (Ignore issue costs of new shares and taxes in parts (a) to (c), but not in part (d))

Answer rating: 100% (QA)

SOLUTION a If the project is accepted and financed by a reduction in the current dividend the new annual dividend per share would be New annual dividend per share Total annual receipts from project Nu... View the full answer