Calvin Ltd is a holding company that owns and controls a number of companies. The Board...
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Calvin Ltd is a holding company that owns and controls a number of companies. The Board of Directors is currently reviewing its methods for estimating the cost of capital and the dividend policy for one of its subsidiaries – Klein Ltd. Details are provided below. Klein Ltd For the most recent year end31 December 2020, the company reported a profit after tax of $800 million. Klein expects this level of profit to continue into the foreseeable future with no growth forecasted. The current dividend payout ratio is 60% and the cost of equity for this company has recently been calculated at 8%. The finance team has proposed two alternative strategies that would impact on the growth rate in profits, the return required by the holders of equity shares and the dividend payout ratio. The proposed strategies are summarised below. Proposed Strategy Growth Rate in Profits Return Required by Dividend Payout Ratio Ordinary Shareholders 1 4 9. 30 6. 12 70 Required: of equity а. Prepare a result from adopting each of the three strategies using the dividend growth model (Current; Proposed 1; and Proposed 2). able that shows the estimated ein Ltd that would Your answers should be calculated to the nearest million dollars. (12 marks) b. Briefly analyse your findings in part (a). (3 marks) c. Critically evaluate the practicality of Modigliani and Miller's dividend irrelevancy theory (10 marks) in the current market environment. Calvin Ltd is a holding company that owns and controls a number of companies. The Board of Directors is currently reviewing its methods for estimating the cost of capital and the dividend policy for one of its subsidiaries – Klein Ltd. Details are provided below. Klein Ltd For the most recent year end31 December 2020, the company reported a profit after tax of $800 million. Klein expects this level of profit to continue into the foreseeable future with no growth forecasted. The current dividend payout ratio is 60% and the cost of equity for this company has recently been calculated at 8%. The finance team has proposed two alternative strategies that would impact on the growth rate in profits, the return required by the holders of equity shares and the dividend payout ratio. The proposed strategies are summarised below. Proposed Strategy Growth Rate in Profits Return Required by Dividend Payout Ratio Ordinary Shareholders 1 4 9. 30 6. 12 70 Required: of equity а. Prepare a result from adopting each of the three strategies using the dividend growth model (Current; Proposed 1; and Proposed 2). able that shows the estimated ein Ltd that would Your answers should be calculated to the nearest million dollars. (12 marks) b. Briefly analyse your findings in part (a). (3 marks) c. Critically evaluate the practicality of Modigliani and Miller's dividend irrelevancy theory (10 marks) in the current market environment.
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Related Book For
Horngrens Financial and Managerial Accounting
ISBN: 978-0133255584
4th Edition
Authors: Tracie L. Nobles, Brenda L. Mattison, Ella Mae Matsumura
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