Question 4 a) TT is a public limited company with a paid-up share capital of 1.2...

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Question 4 a) TT is a public limited company with a paid-up share capital of 1.2 million RM1 shares and no long-term debt. The dividend has been paid 45 cent per share in each of the past two years and the market price per share has not varied significantly from its current market price of RM3.60. The company now wishes to finance the expansion of its existing premises and the board has announced a rights issue of one new ordinary share at a price of RM3.00 for every four shares currently held. The company forecasts that future dividends will be at a rate of 43.5 cent per share on the enlarged share capital and that its existing ratio of dividend cover can be maintained. You are required to comment on the theoretical and the practical validity of the following reactions to the announcement from various shareholders: 'I hold 5% of the equity. Whether I take up or surrender my rights, I should be getting a bargain at the offer price of RM3.00.' b) Justify the appropriate time for a firm to use stock splits and stock dividends. (17 marks) (9 marks) c) YT Berhad's stock price was at RM 100 per share when it announced that it will cut its dividends for next year from RM 10 per share to RM 6 per share, with additional funds used for expansion. Prior to the dividend cut, YT Berhad expects its dividends to grow at 4 percent rate. However with the expansion, dividends are now expected to grow at 7 percent. In your opinion, will the announcement of the dividend's cut affect YT Berhad stock price? (7.33 marks) Question 4 a) TT is a public limited company with a paid-up share capital of 1.2 million RM1 shares and no long-term debt. The dividend has been paid 45 cent per share in each of the past two years and the market price per share has not varied significantly from its current market price of RM3.60. The company now wishes to finance the expansion of its existing premises and the board has announced a rights issue of one new ordinary share at a price of RM3.00 for every four shares currently held. The company forecasts that future dividends will be at a rate of 43.5 cent per share on the enlarged share capital and that its existing ratio of dividend cover can be maintained. You are required to comment on the theoretical and the practical validity of the following reactions to the announcement from various shareholders: 'I hold 5% of the equity. Whether I take up or surrender my rights, I should be getting a bargain at the offer price of RM3.00.' b) Justify the appropriate time for a firm to use stock splits and stock dividends. (17 marks) (9 marks) c) YT Berhad's stock price was at RM 100 per share when it announced that it will cut its dividends for next year from RM 10 per share to RM 6 per share, with additional funds used for expansion. Prior to the dividend cut, YT Berhad expects its dividends to grow at 4 percent rate. However with the expansion, dividends are now expected to grow at 7 percent. In your opinion, will the announcement of the dividend's cut affect YT Berhad stock price? (7.33 marks)

Answer rating: 100% (QA)

a Theoretical Validity The shareholders assertion is theoretically valid assuming efficient markets and rational behavior With a current market price of RM360 the rights issue allows shareholders to p... View the full answer