Question Paper P4 Advanced Financial Accounting

Question Paper P4 Advanced Financial Accounting
ACCA REVISION MOCK June 2010 Question paper Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into
two sections: Section A TWO compulsory questions Section B TWO questions ONLY to be attempted Formulae Sheet and Mathematical Tables are
on pages 3, 4, 5, 6 and 7 Do NOT open this paper until instructed by the supervisor This question paper must not be removed from the examination
hall Kaplan Publishing/Kaplan Financial KAPLAN PUBLISHING Page 1 of 14 Paper P4 Advanced Financial Management ACCA P4 Advanced
Financial Management © Kaplan Financial Limited, 2010 All rights reserved. No part of this examination may be reproduced or transmitted in any
form or by any means,... Show more content on Helpwriting.net ...
If d1 > 0, add 0.5 to the relevant number above. If d1 < 0, subtract the relevant number above from 0.5. KAPLAN PUBLISHING Page 5 of 14 ACCA
P4 Advanced Financial Management Present value table Present value of ВЈ1, i.e. (1 + r)–n where r = discount rate n = number of periods until
payment Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Periods (n) 1 2 3
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Dividend Policy
Question 1
If we take a look at the company's compounded annual growth rate in EPS we can see that Georgia Atlantic's growth rate is really low compared
to the industry average. Furthermore we can see from the first table that Georgia Atlantic's P/E ratio is also lower in all the years as compared to
the industry and the M/B ratio is also relatively low compared to the industry. Due to the fact that Georgia Atlantic is operating in a relatively mature
market, there is a very low possibility for growth, that's why we consider Georgia Atlantic as a low growth company. For low growth companies it is
normal to have a low P/E ratio and a low B/M ratio because most of the company's value comes from their current operations and assets. Because ...
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Highly levered firms look forward to maintaining their internal cash flow to fulfill duties, instead of distributing available cash to shareholders and
protect their creditors. This is because firms with high leverage ratios have high transaction costs, and are in a weak position to pay higher dividends
to avoid the cost of external financing. While firm value can be increased by financial leverage, too much leverage leads to a shrinking company value
as bankruptcy costs start to outweigh tax shield benefits. The higher risk makes debt holders asking for higher returns to compensate them for the
increase in bankruptcy risk. Since dividend payments reduce the amount of capital available to secure the debt, many debt contracts include
restrictions on dividend payments. Bond indentures restrict dividend payments subject to minimum safety ratios. These two effects, the higher costs
of debt and the restrictions to pay dividends have, of course, a direct effect on the company's ability to pay dividends. The high leverage of Georgia
Atlantic, which is well above its industry average, reduces the possibilities for the firm in terms of its dividend policy. Holding Georgia Atlantic's
dividend payout history in mind, it might seem to be a bad time to start thinking about a policy change.
Question 6 1) No Cash Dividends, No Stock Dividends or Split
This strategy is not recommendable because firstly the

Finance Questions and Answers
TUTORIAL 1 – TUTORIAL DISCUSSION QUESTIONS
2. (a) Discuss the role of money in a financial system.
money is a financial asset that facilitates financial and economic transactions
a medium of exchange–swapped for goods and services
a store of value–wealth is held or measured in money terms
a standard of deferred payment–used to record indebtedness
a unit of account–transactions are priced in money terms
currency is generally divisible, portable and durable
(b) Does money have to be currency? If not, what are some alternatives?
money is anything that is universally acceptable as a medium of exchange
further, money generally has the characteristics of being divisible and a store of value
examples: currency, ... Show more content on Helpwriting.net ...
Examples, commercial banks, building societies, credit unions
contractual savings institutions. Their liabilities (sources of funds) are contracts that generate periodic cash flows, such as insurance contracts and
superannuation savings. Their accumulated funds are used to purchase both real and financial assets. Includes insurance offices and superannuation
funds
finance companies. Provide loans mainly to small business and retail customers. Also provide lease finance. No depositors, therefore they borrow funds
in the money and capital markets to finance their activities
investment banks and merchant banks. Specialise in the provision of off–balance–sheet advisory services such as providing advice on mergers and
acquisitions, balance sheet structuring, risk management
unit trusts and managed funds. A unit trust is formed under a trust deed. Investors purchase units issued by the trustee. The trust invests in specificasset
classes (such as equity or property) within the terms of the trust deed
5. As an employee of the finance department of a corporation you are asked to explain the matching principle to an executive of the organisation. You
know that you will need to give practical examples. What are you going to advise the executive?

Matching principal:
short–term assets should be funded by short–term liabilities. Example, use a bank overdraft to finance the purchase of

CLAW2201 notes Essay
CLAW2201 Week 6: COMPANY FINANCE:
1. EQUITY FINANCE– fundraising through share issues
a) Share Capital:
i. Issue of shares
S124(1)(a): A company has a right to issue and cancel shares in the company.
S198A(1): The board of directors has discretion as to when and how to issue shares
S254B(1): A company may determine:
The terms of which its shares are issued; and
The rights and restrictions attaching to the shares.
S254D(1) CA: In a proprietary company, before issuing shares of a particular class, the director must offer them to the existing holders of shares of
that class. As far as practicable, the number of shares offered to each shareholder must be in proportion to the number of shares of that class that they
already hold. ... Show more content on Helpwriting.net ...
(15) No consideration is to be provided for the issue or transfer of the securities (e.g. no monetary payments).
(18) Made as consideration for an offer to acquire securities under a takeover bid (when one company takes over another company, disclosure
statements for shares in exchange for the surrender don't need ordinary disclosure because the whole process is already highly regulated under the
disclosure requires of the CA).
S709 provides for the different TYPES of disclosure documents possible:
(1) Prospectus – full disclosure doc
(2) Short form prospectus – refer to materials lodged w ASIC
(2) A profile statement– requires ASIC approval
(3) Offer information statement– for issue of securities $10m or less s709(4).
S718 states that a disclosure document to be used for an offer of securities must be lodged with ASIC.
May ONLY be issued by public companies– s113(3)– pty co must x engage in activity requiring disclosure

2. DEBT FINANCE: fundraising through borrowing
Loan Capital:
S124(1) states that a company can (f) grant a security interest over the co's property.
Security:
Co= grantor, Lendor= security holder, fixed charge= security int over non–circulating asset s339(4) PPSA, floating charge= circulating security interest
in circulating asset, consider if security interest has "attached" and is "perfected", no diff b/w floating & fixed charge; look at who got

Brealey. Myers. Allen
Chapter 16 Payout Policy
Multiple Choice Questions 1. Firms can pay out cash to their shareholders in the following ways: (I) Dividends (II) Share repurchases (III) Interest
payments A) I only B) II only C) III only D) I and II only Answer: D Type: Easy Page: 415
2. Dividends are decided by: (I) The managers of a firm (II) The government (III) The board of directors A) I only B) II only C) III only D) I and II
only Answer: C Type: Easy Page: 416
3. Which of the following dividends is never in the form of cash? (I) Regular dividend (II) Special dividend (III) Stock dividend (IV) Liquidating
dividend A) I only B) II only C) III only D) I, II, and IV only Answer: C Type: Easy Page: 417
168
Test Bank, Chapter 16
4. Firms can ... Show more content on Helpwriting.net ...
The indifference proposition regarding dividend policy: A) Assumes that tax rates increase at the same rate as inflation B) Assumes that investors are
indifferent about the timing of dividend payments C) States that investors are indifferent between stock dividends and cash dividends D) States that
investors are indifferent between stock repurchase and cash dividends Answer: B Type: Medium Page: 422
17. One key assumption of the Miller and Modigliani dividend irrelevance is that: A) Future stock prices are certain B) There are no capital gains
taxes C) Capital markets are efficient D) All investments are risk–free Answer: C Type: Medium Page: 422
18. The dividend–irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend
policy. A) The level of investment does not influence or matter to the dividend decision B) Once the dividend policy is set the investment decision
can be made as desired C) The investment policy is set before the dividend decision and not changed by dividend policy D) None of the above Answer:
C Type: Medium Page: 425

19. Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this
dividend forever, calculate the stock price today. (the required

Inflation Is Assumed
Inflation is assumed
Chapter 1
True / False Questions 1. Inflation is assumed to be a temporary problem that does not affect financial decisions.
FALSE
2. Financial Capital is composed of long–term plant and equipment, as well as other tangible investments.
FALSE
3. Real Capital is composed of long–term plant and equipment.
TRUE
4. During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, reorganization of financially
troubled corporations and bankruptcy.
TRUE
5. In the mid 1950s, finance began to change to a more analytical, decision–oriented approach.
TRUE
6. Recently, the emphasis of financial management has been on the ... Show more content on Helpwriting.net ...
TRUE
32. Financial management requires both short–term activities as well as long–term planning such as raising funds.
TRUE
Multiple Choice Questions 33. What is the primary goal of financial management?

A. Increased earnings
B. Maximizing cash flow
C. Maximizing shareholder wealth
D. Minimizing risk of the firm
34. In the past, the study of finance has included
A. mergers and acquisitions.
B. raising capital.
C. bankruptcy.
D. all of these.
35. Professor Merton Miller received the Nobel prize in economics for his work on
A. dividend policy.
B. investment theory.
C. working capital management.
D. capital structure theory.
36. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the
A. options pricing model.
B. theories of working capital management.
C. theories of risk–return and portfolio theory.
D. theories of international capital budgeting.
37. Proper risk–return management means that
A. the firm should take as few risks as possible.
B. the firm must determine an appropriate trade–off between risk and return.
C. the firm should earn the highest return possible.
D. the firm should value future profits more highly than current profits.
38. One of the major disadvantages of a sole proprietorship is
A. that there is unlimited liability to the owner.
B. the simplicity of decision making.
C. low

Nt1310 Unit 4 Case Study
2. a. I will use quarterly Compusta data.
b. I will estimate both regular and special dividend initiation, and repurchase/
c. We need an exogenous shock to dividend tax rate in order to test how dividend taxation affect divided policy. I will use the 2003 Dividend cut.
There are many factors for dividend vs repurchase. In addition to dividend tax, Roni also talked about the signaling role of payout policy, agency
problem related to payout policy and behavioral biases related to divided vs, repurchase. Therefore, it is not clear now tax affected divided policy. An
exogenous shock to dividend tax rate isolates the effect of tax on payout policy. We assume that dividend tax cut does not change other factors such
firm's agency problem or investor's

Hampton Machine Tool
Hampton Machine Tool Company, a machine tool manufacturer, was founded in 1915. Hampton 's customer base is made up primarily of military
aircraft manufactures and automobile manufactures in the St. Louis area. Hampton felt the boom in the 1960s with record setting profits in the mid to
late 1960s. Hampton slowed down in the 1970s with the withdrawal from Vietnam War and the oil embargo. Hampton stabilized by the late 1970s and
now has a larger market share as other competitors were unable to make it through the tough times. It is now September 14, 1979 Hampton has asked
for an extension to the end December 1979 on the $1 million loan they took out from the St. Louis National Bank at the end of December 1978. The
loan was originally ... Show more content on Helpwriting.net ...
(Exhibit 5) This may only have a nominal effect on their current problem, but is a move they should make nonetheless. I have assumed they have not
been doing this since they show no interest revenue on their income statement. This would not solve their short cash flow problems, but it would be a
sound practice to implant for the future. A savings account is a safe nonvolatile place to have themoney and it is instantly accessible to Hampton.
They should also change their billing policy to help finance the projects. They should bill their customers monthly based on the percentage of
completion method currently a general accepted accounting principle. This will help them match the cash flows from the jobs with related expenses
and will remove their cost of financing the jobs. This is an assumption that changing away from their current billing process will not result in lost
jobs in the future. They will not be able to start this with their current jobs, but rather new ones coming in. If they are able to start these new jobs by
October they will be able to bill the consumers at the end of October and expect payments from them by the end of November. The consumers billed at
the end of November should get their payments in be December 30th given the current net 30 payment terms which would make it sufficient time for
this amount to be available to help repay the loan.
They may want to resell some of the

Dividend Policy At Linear Technology
Xiaoling Tang
FIN 46059 Summer2015
William Billik
08/04/2015
Dividend Policy at Linear Technology Linear Technology dividend policy is considered a dividend stability policy because of the approach in its
allocation. Different from the residual and hybrid approaches, it involves paying dividends in quarters. The quarterly dividends are paid considering
fractions of the yearly earnings. This approach is also good because it reduces the uncertainty that investors may have as it provides income for them.
The revenue and the sales of the fiscal year of this company have increased over the years. Therefore, the company has had a steady increase in the
percentage of dividends provided over the years. The company realized a good opportunity of ... Show more content on Helpwriting.net ...
The provision of dividends is always associated with several problems in the process. Paying dividends regularly can easily lead to unrealistic
expectations among the shareholders. Any irregularity in a dividend provision policy might raise issues of discontent among the investors or parties
dependent on it, which results in the pressure on the company to maintain the dividends, such as the Linear Technology; they will have to maintain
their policy of increasing the dividend's percentage. Therefore, a company's bad or poor performance that might affect the dividends is easily realized
by the investors, which is disadvantageous for business.
Also, when the demands for dividends increase, cash flow for the company can be prevented. The chances of the company reinvesting profits in
their future growth are also minimized in the process. This can strain the future payment of dividends easily if the company gets to face challenges.
Like in the Linear company scenario, if they don't interfere with the provision of dividends, they might be affected in the future. The ideas on
providing dividends tend to vary when challenges come in; that is why the companies are always recommended to discuss and critically analyze
their position before making such major decisions. Dividends also prove to be a blunt instrument for a reward. This is because dividends are
rewarded to you regardless of whether you fully or partially depend on it. While it is non–discriminatory, the

Apple Financial Analysis 1
The following paper is a Financial Analysis of Apple, Inc. The paper is an unorthodox Financial Analysis of Apple, but will cover all the key aspects
of a Financial Analysis – albeit in a different way. The first section of the Financial Analysis will have preconceived notions of Apple (what an
individual thinks of Apple, without the facts in his hand – in this case the Financial Analyst of this paper), the Financial Analysis– which includes
stock performance, various financial ratios, dividend payout, graph of Nike 's stock performance, graphs of its competitors, graph of its market segment,
interest coverage ratios, dividend yield ratios, etc., and a conclusion which contains opinions of the Financial Analyst on Apple 's future... Show more
content on Helpwriting.net ...
Beginning 2005, Microsoft shifted from its annual dividends to quarterly dividends. And in September of 2006, Microsoft announced that it would
increase its quarterly dividends by $.01 and pay $.10 quarterly dividends to its shareholders. The Quarterly Dividend Record date for Microsoft
shareholders is November 16, 2006.
Apple, Inc. Key Statistics
As of January 18, 2007, Apple 's Current Market Rate is about $76.54 billion (from Yahoo Finance). Apple, Inc. beta is 2.41 on Yahoo, while Reuters
shows Apple, Inc. beta as 1.47, I am not sure which of the either is accurate or obsolete. Apple, Inc. has 859.27 million shares outstanding, of which
insiders hold institutions hold 4.76% and 77.50%. At 4:01 PM EST, Apple 's stock traded at $89.07, down 6.19%.
For 52 weeks Ending 2001–09–29, Apple had $5,363 million in revenues, gross profit of $1,235 million, and a NEGATIVE operating income of $344
million. It incurred a loss of $52 million before tax, and Income After Tax was NEGATIVE $37 million. Apple improved its position in the next year,
having revenues of $5,742 million, gross profit of $1,603 million, and a positive income of $17 million. Apple 's income after tax for the fiscal year
was $65 million. For Fiscal Year ending 2003–09–27, Apple increased its Total revenue and expenses. Apple 's total revenues stood at $6,207 million,
negative total expenses of $6,208 million. Apple 's income after tax stood at $68 million, and a net income of

Tax Section 311 Taxability of a Corporation on Dividends
A corporation that distributes property that has appreciated in value must recognize a gain at the time of distribution. The corporation is treated as if
it had sold the property. The gain equals the property 's fair market value less its adjusted basis. Code Sec. (b). However, the corporation does not
recognize a loss if the property had declined in value. Also, the corporation recognizes no gain or loss if t distributes its own stock rights to its
shareholders. Code Sec. (a). The character of the recognized gain depends on the property distributed; thus it may be ordinary income, capital gain, or
Section 1231 gain.
An example illustrating this section was the Tax Court, deciding in favor of the IRS, held in Pope & Talbot, Inc., v. Com,... Show more content on
Helpwriting.net ...
The Tax Court, per Judge Ruwe, issued an order on May 8, 1995, denying Pope & Talbot 's motion and granting the IRS 's motion. The court 's
opinion characterized the issue before it as one of "first impression," and found resort to the legislative history of the statute necessary since the court
was unable to "achieve...certainty based on the language of the statute." After reviewing the legislative history of IRC Sec. 311, the court observed the
following: It is apparent that the purpose underlying IRC Sec. 311(d) was to tax the appreciation in value that occurred while the corporation held the
property and to prevent a corporation from avoiding tax on the inherent gain by distributing such property to its shareholders...It follows that we must
focus on the value of the Washington properties as owned by petitioner and value them as if petitioner had sold them at fair market value at the time of
distribution.
The court also remarked that "theoretically" the partnership could have sold the property at fair market value and then distributed the proceeds. If this
had been done, the court continued, the shareholders would then have been able to realize a "proportionate share" of the full FMV of the property
distributed.
The court found unpersuasive Pope & Talbot 's argument that the plain meaning of IRC Sec. 311(d) mandated that distributions of property to
shareholders be valued by

Finance
CHAPTER 14
COST OF CAPITAL
Answers to Concepts Review and Critical Thinking Questions
1.It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this, value is created.
2.Book values for debt are likely to be much closer to market values than are equity book values.
3.No. The cost of capital depends on the risk of the project, not the source of the money.
4.Interest expense is tax–deductible. There is no difference between pretax and aftertax equity costs.
5.The primary advantage of the DCF model is its simplicity. The method is disadvantaged in that (1) the model is applicable only to firms that
actually pay dividends; many do not; (2) even if a firm does pay ... Show more content on Helpwriting.net ...
10.If the different operating divisions were in much different risk classes, then separate cost of capital figures should be used for the different
divisions; the use of a single, overall cost of capital would be inappropriate. If the single hurdle rate were used, riskier divisions would tend to receive
funds for investment projects, since their return would exceed the hurdle rate despite the fact that they may actually plot below the SML and, hence, be
unprofitable projects on a risk–adjusted basis. The typical problem encountered in estimating the cost of capital for a division is that it rarely has its
own securities traded on the market, so it is difficult to observe the market's valuation of the risk of the division. Two typical ways around this are to
use a pure play proxy for the division, or to use subjective adjustments of the overall firm hurdle rate based on the perceived risk of the division.
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints,
when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each
problem is found without rounding during any step in the problem.

Basic
1.With the information given, we can find the cost of equity using the dividend growth model. Using this model, the cost of

Investment Policy Among Saudi Arabia Essay
1.0.Abstract
The research paper analyzes and critiques a number of literature materials on dividend policy among Saudi firms with much focus on non–financial
firms. In Saudi Arabia, dividend policy is an imperative tool because most companies retain close to 100 percent of their earnings in dividends. In this
economy, firms are majorly funded by bank loans and thereof, there exists no capital or income gains taxes. Some of the most identifiable factors
influencing dividend policy of both non–financial and financial companies in Saudi are discussed in the current paper. The current paper is a report
compiled to my firm's manager's to help him understand the strategic financial policies in relation to the real life specifically, concerning dividends
policy in Saudi Arabia. In order to address all his interests in the topic, I have undertaken to divide the report into sections namely: abstract,
introduction, literature review and conclusion.
Key words: dividends, financial policies, Saudi Arabia
2.0.Introduction
Dividend policy is a major financial decision that a company has to make in order for the shareholders to be rewarded for their investment in the
business. It is one of the most predictable and stable element of a firm. Most firms commence dividend payment when the firm matures because at such
a period, the firm receives fewer opportunities to invest into in order to raise their capital. It is, therefore, imperative for the management of the
company to know predict

Miller And Modigliani's Dividend Irrelevance Theory?
2.4.1. Dividend irrelevance theory
Miller and Modigliani (1961) proposed the dividend irrelevance theory, suggesting that the wealth of the shareholders is not affected by the dividend
policy. It is argued that the value of the firm is subjected to the firm's earnings, which comes from company's investment policy. The literature proposed
that, the dividend does not affect the shareholders' value in the world without taxes and market imperfections or perfect capital market. Further they
argued that dividend and capital gain are two main ways that can contribute profits of the firm to the shareholders. When a firm chooses to distribute
its profits as dividends to its shareholders, then the share price will be reduced automatically by the amount of a dividend per share on the ex–dividend
date. So, they proposed that in a perfect market, dividend policy does not affect the shareholder's return. The main assumptions ... Show more content
on Helpwriting.net ...
This arises when management acts in their own interest rather than on behalf of the shareholders who own the firm. This is contrary to the assumptions
of Miller and Modigliani (1961), who assumed that managers are perfect agents for shareholders and no conflict of interest exists between them. But,
that assumption is somewhat questionable, as the owners of the firm are different from the management. Managers may conduct some activities, which
could be costly to shareholders, such as undertaking unprofitable investments that would yield excessive returns to them and unnecessary high
management compensation (Al–Malkawi, 2007). These costs are borne by shareholders; therefore, shareholders of firms with excess free cash flow
would require high dividend payments, because managers can misuse the excess free cash flow. Subsequently, high dividend paying firms perceive as
fairly governed entities and investors willing to pay a premium for

Dividend Irrelevance Theory-Modigliani & Miller ( 1961 )
Dividend Irrelevance Theory– Modigliani & Miller (1961)
Since the emergence of the so–called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay
dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no
market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market
valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm
distributes it income because the firms' value is rather determined by their investment policies and the earning power of its assets. They further stated
that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.
In accordance to this, MM provided assumptions to support their findings. These assumptions can be characterized by the existence of a perfect capital
market where;
there is no taxes or transactional costs
there is free accessibility to information about market
no buyer or seller has significant influence on the ruling share prices
investors are rational and risk averse, meaning they will always value securities with higher returns than securities with lower returns.
managers act on behalf of shareholders' and there is complete assurance about the investment policies and future cashflows of every corporation.
It is also important to note that these assumptions are untenable in the real world and if violated may lead to the relevance of dividend policy not
because dividends are preferred.
The Miller and Modigliani (1961) study was often used as a starting with Black and Scholes (1974); Merton and Rock (1995) and Bernstein (1996)
who supported their findings. However, in later research, several studies disapproved of their findings (Walter,1963; Litzenberger and Ramaswamy,
1982; Fama and French, 2002 and Kajola et al., 2015).
Bird in the Hand Theory– Lintner (1962) and Gordon (1963)
This hypothesis posited that an increase in dividend pay–out decisions has a

Stock and Company
Week 7 Chapter 6: Investors in the Share Market True/False QUESTIONS 1. Investing in shares of publicly listed corporations should, on average,
over time provide a higher return than investing in fixed–interest securities. a. True b. False 2. Investments through a stock exchange are limited to
ordinary shares issued by listed corporations. a. True b. False 3. Portfolio theory contends that a diversified share portfolio enables an investor to
significantly reduce the portfolio's exposure to systematic risk. a. True b. False 4. A share that has a beta of one is twice as risky as an average share
listed on a stock market. a. True b. False 5. Shares that typically demonstrate a negative price correlation will usually move in the same direction...
Government: Commonwealth, state and government trading enterprises D. Overseas–the rest of the world 6. The risk that impacts specifically on the
share price of a particular company is called: A. economic risk B. business risk C. systematic risk D. unsystematic risk 7. When investors buy and
sell shares based on receiving new information on shares and markets, this is known as: A. active investment B. a diversified strategy C. a market
replication strategy D. passive investment 8. To track the S&P500, a fund manager can buy: A. all the stocks in the S&P500 B. an S&P500 index
fund C. a percentage of stocks that essentially tracks the index D. All of the given answers. 9. The correlation of pairs of securities within a portfolio
is called: A. co–association B. correspondence C. covariance D. variance 10. The correlation between two shares: A. can take on positive values
MAF 702 Lecture 7 (Topic 7) MCQs and T/F Questions Page 3 B. can take on negative values C. is related to the covariance of a share D. All of the
given answers. 11. Portfolio risk is heavily based on: A. a simple average of the variance of the stocks in the portfolio B. a weighted average of the
variance of the stocks in the portfolio C. a weighted average of the covariance of the stocks in the portfolio D. the standard deviation of the stocks 12.
When an investor alters the mix of their portfolio to reflect market changes, this is called _____ asset allocation A. market timing B. passive

Decision Making
–––––––––––––––––––––––––––––––––––––––––––––––––
CHAP 19
When a company issues securities to the general public, it usually uses the services of an investment banker who underwrites (purchases at a fixed
price on a fixed date) new securities for resale.
For this service, investment bankers receive the difference, or underwriting spread, between the price they pay for the security and the price at which
the security is resold to the public.
There are three primary means by which companies offer securities to the general public:
1) Traditional (or firm commitment) underwriting
If the issue does not sell well, either because of an adverse turns in the, market or because it is overpriced, the underwriter, not the company, ... Show
more content on Helpwriting.net ...
The stock is therefore said to trade "rights–on" prior to the ex–rights date. On or after the ex–rights date, the stock is said to trade "ex–rights." That is,
the stock is traded without the rights attached.
Pas pigГ©:
Suppose that a rights offering has been announced and that the stock is still selling "rightson." An investor wishing to be sure of owning one share of
stock trading "ex–rights" could buy one share of stock just before the stock went "ex–rights" for the "rights–on" market price of the stock and simply
hold the stock. Alternatively, the investor could purchase the number of rights necessary to purchase one share, set aside an amount of money equal to
the subscription price, and wait until the subscription date to purchase the stock. The difference between the two options is that the former gives the
investor one right in addition to one share of stock.
Warning:
We should be aware that the actual value of a right may differ somewhat from its theoretical value because of transactions costs, speculation, and the
irregular exercise and sale of rights over the subscription period. However, arbitrage acts to limit the deviation of the actual value from the theoretical

value.
Standby Arrangement
A measure taken to ensure the complete success of a rights offering in which an investment banker or group of investment bankers agrees to "stand by"
to underwrite any

Berkshire Hathaway
ISSUES
Warren Buffet invoked the substance–over–form concept to justify accounting for the GEICO and General Foods transactions as dividends
distributions rather than sales of stock. Do you agree with Buffet that the substance of each of the proportionate redemptions was a dividend and not a
sale of stock?
In deciding how to account for an unusual or unique transaction for financial reporting purposes, should one consider the tax treatment applied to the
transaction?
Did Peat Marwick have a right to change its position on the proper accounting treatment for the stock redemptions? What factor or factors may have
been responsible for Peat Marwick's decision to change its position regarding these transactions?
FACTS
In 1983, GEICO ... Show more content on Helpwriting.net ...
When asked to comment on Buffet's criticism of Peat Marwick in his company's 1984 annual report, a Peat Marwick partner simply noted, "It's the
client's prerogative to disagree. Our report speaks for itself." Another prerogative of an audit client is to change auditors. In 1985, Berkshire retained
Touche Ross & Company to audit its financial statements. As required by the Securities and Exchange Commission, Berkshire filed an 8–K statement
with that federal agency to disclose the change in auditors. In that statement, Berkshire reported it was "dissatisfied" with Peat Marwick's inconsistency
regarding the proper accounting treatment for stock redemptions.
AUTHORITY/ANALYSIS
The substance over form accounting concept means that the economic substance of transactions and events must be recorded in the financial
statements rather than just their legal form in order to present a true and fair view of the affairs of the entity. Preparers of the financial statements
should use their judgment when employing the substance over form concept, which helps to derive the business sense from the transactions and events
and to present them in a manner that best reflects their true essence. In some instances the legal aspects of transactions and events may have to be

disregarded in order to provide more useful and relevant information to the users of financial statements. The concept of

Disadvantages Of Dividend
Dividend investing is investing in stocks for large cash dividends so that is a regular return on the investment in the form of cash. In fact receiving
dividends is very much like collecting interest on money deposited in a bank account. In stock markets, predicting the rise and fall of share prices is
very much difficult and in many ways dividend stocks offer a safe way of getting returns. In addition to that dividend stocks also have several other
advantages over non–dividend stocks.
Let us try to understand the concept of dividend. When a company earns the profit, it either invests that profit in back in the company for growth or
pays back the profits to its shareholders in the form of dividends, so that they get some return from the investments ... Show more content on
Helpwriting.net ...
Let us say a company has shares which have a market value of Rs.50 and face value Rs.10. It decides to pay a dividend of 50% on each of its shares.
As such the dividend paid on each of shares would be 50% of Rs.10 which is Rs.5. The dividend yield would be dependent on the market value of the
stock and not on the face value. In this case the dividend yield would be (Rs.5/Rs.50) X 100 = 10%.
The process of paying dividends has several stages. Initially, the board of directors of the company declares a dividend and sets a dividend record
and payment date. A record date is the date as of which the shareholders are entitled to receive the dividend. The payment date is the date when the
dividend is actually paid to the shareholders who had held the shares of the company on the record date.
Dividends give a good idea of the fundamentals of the company as they give a good indication of the cash flows into the company. A company's
financial health can be easily made to look healthy in terms of net income or earnings per share (EPS) by doing some manipulations on the
accounting part. However, with dividends such things are not possible as they are to be paid from the company's cash flows they cannot be
manipulated through accounting tricks. Companies that pay dividends tend to be more mature and stable as a company is only able to pay dividends
after attaining a sustainable level of

Net Present Value and Question
SEAT NUMBER: ............. ROOM: .................... FAMILY NAME................................................. This question paper must be returned. Candidates are
not permitted to remove any part of it from the examination room. OTHER NAMES............................................... STUDENT
NUMBER.........................................
SESSION 2 EXAMINATIONS NOVEMBER 2012
Unit Code and Name: AFIN252, Applied Financial Analysis and Management Time Allowed: 3 hours plus 10 minutes reading time. Total Number of
Questions: 50 Multiple Choice Questions plus 8 full response questions. Instructions: 1. PART A (30 marks): There are 50 multiple choice questions.
Answers to these must be recorded on a red–coloured General Purpose Answer Sheet which will be marked by a computer. Please make sure your
name is on this sheet.
2. ... Show more content on Helpwriting.net ...
Question 6 Coolibah Holdings Limited is expected to pay dividends of $1.13 every six months for the next three years. If the current price of Coolibah
stock is $22.40, and Coolibah 's equity cost of capital is 16%, what price would you expect Coolibah 's shares to sell for at the end of three years? A)
$26.74 B) $28.82 C) $29.36 D) $31.36 E) $34.96
4(41)
Question 7 Ascension Limited will pay a dividend of $1.80 per share one year from today and a dividend of $2.40 per share two years from today. It is
expected that Ascension 's share price will be $44 per share immediately after the second dividend payment. If Ascension has an equity cost of capital
of 8%, what is the maximum price that a prudent investor would be willing to pay for an Ascension Limited share today? A) $39.27 B) $40.22 C)
$41.45 D) $42.40
Question 8 Which of the following statements is FALSE? A) As firms mature, their earnings exceed their investment needs and they begin to pay
dividends. B) Total return equals earnings multiplied by the dividend payout rate. C) Cutting the firm 's dividend to increase investment will raise the
share price if, and only if, the new investments have a positive net present value (NPV). D) We cannot use the constant dividend growth model to value
the shares of a firm with rapid or changing growth.

5(41)
Question 9 Bandicoot Enterprises just announced that it plans to cut its dividend (in one year

Torstar Case Study
Problem Statement: The problem is determining what form of dividend policy Torstar Corporation should use to best benefit their shareholders while
not sacrificing Torstars ability to acquire strategic investments to maintain capital expenditure requirements. This includes determining policies on
dividend payouts, stock repurchases stock splits. This case will be analyzed from the point of view of Robert Steacy, Vice–President of Finance of
Torstar Corporation.
Background: On April 28th, 1998, Robert Steacy will meet with the board of directors to discuss his memorandum stating the pros, cons and
recommendations with respect to the amount of regular dividends, special dividends and share repurchases. This company is a broadly based ... Show
more content on Helpwriting.net ...
This also shows investors that the company has confidence in themselves. A stock repurchase plan that doubles its current purchasing of Class B stocks
would be ideal under this alternative. Finally, Robert Steacy should take into account the possibility of a stock split. This is an increase in a firm's
shares outstanding without any change in owner's equity. These are often used to get the stock trading within the trading range – the price range
between the highest and lowest prices at which a stock is traded. Since increasing the repurchase of their own stock will increase the price of their
shares, in order to lower the price so that it is more affordable to all they will have to introduce a stock split of around 2 to 1. Financial analysis of
Alternative II is located in Appendix B. Notice that I didn`t calculate anything to do with EPS or Share Price – this is because though the EPS will go
up (and the share price will be reduced following the stock split), ultimately the equity of the company will not change.
Recommendations: The recommendation that Robert Steacy should provide to his board of directors would be to give out a regular dividend with an
extra dividend of around 10–15% of the original dividend. In addition, in order to make bundles of their stock more affordable (they have had 5 years
now of historic highs) Torstar should split their stock 2 to 1. Another great thing would be to repurchase the stock– this will

Fin 516 Quiz 1 Essay
1.| Question :| (TCO C) Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60 percent debt and 40
percent equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?
(a) 40.61%
(b) 42.75%
(c) 45.00%
(d) 47.37%
(e) 49.74% | | | Student Answer:| | (d) 47.37 Equity required (Residual income) = $625,000*40% = $250,000 Dividend paid = $475,000 – $250,000 =
$225,000 Dividend payout ratio = 225000/475000 = 47.37% | | Instructor Explanation:| Answer is: d
Text: pp. 570–572 – Residual Dividends, Chapter 14
Capital budget $625,000
Equity ratio 40%
Net income (NI) $475,000
Dividends ... Show more content on Helpwriting.net ...
A similar firm with no debt should have a smaller valu(e) Here is the calculation:
VTotal = VU + VTS, so VU = VTotal– VTS = D + S – VTS.
Value tax shelter = VTS = rdTD/(rsU– g) = 0.09(0.40)($200,000)/(0.12 – 0.05) = $102,857
VU = $300,000 + $200,000 – $102,857 = $397,143 | | | | Points Received:| 20 of 20 | | Comments:| | | | 5.| Question :| (TCO A) Which of the following
statements is CORRECT?
(a) An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more
than its exercise value.
(b) As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the
fixed strike price increases.
(c) Issuing options provides companies with a low cost method of raising capital.
(d) The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
(e) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.| | | Student Answer:| |

Dividend Tax
A dividend tax is an income tax paid on the earnings from a corporation that is distributed to its shareholders. Dividend payments are treated as
ordinary income, and they are taxed as if the taxpayer had earned income through active work. Presently, there is much controversy surrounding the tax.
The government taxes dividends twice: It first taxes corporate income, then taxes the same income again when shareholders receive dividends paid out
of corporate income. Which is a "double taxation"( http://pages.stern.nyu.edu/~byeung/dividend%20taxation.pdf). The double taxation raises the
questions of whether the tax should be eliminated, and which taxes should be cut. With both sides ..., the dividend tax ... because...,
The dividend tax was ... Show more content on Helpwriting.net ...
Currently, as of January 1st 2011, dividends will be taxed at the personal income rate rather than the qualified dividend rate. It should be noted that
dividends are distributed after the government has already been allocated its 35 percent corporate tax
Cutting the dividend tax also means more money to the consumer. These cuts will allow more money to be put into the banking system, and have a
direct effect on the money multiplier, which would put even more money into the economy. Instead of the economy receiving stimulus packages, a
dividend tax cut would give people more disposable income and encourage investment into U.S. companies.
Removal of dividend taxes would allow for investors and retirees to have more spending money. Out of all post–retirees, 50 percent report a dividend
tax (Messerli). This is significant because senior citizens, and those still saving for their retirement, would have more discretionary income available.
The additional discretionary income could also be used as a way to complement and provide relief for social security.
Elimination of the dividend tax could lead to more accurate accounting and administration of corporation. They would have fewer incentives to
misapply generally accepted accounting principles (Wharton). They would have fewer incentives to hide profits because the dividends would not be
taxed because profits are shown below the taxation

Hampton Machine Tool Essay
Hampton Machine Tool Company, a machine tool manufacturer, was founded in 1915. Hampton's customer base is made up primarily of military
aircraft manufactures and automobile manufactures in the St. Louis area. Hampton felt the boom in the 1960s with record setting profits in the mid to
late 1960s. Hampton slowed down in the 1970s with the withdrawal from Vietnam War and the oil embargo. Hampton stabilized by the late 1970s and
now has a larger market share as other competitors were unable to make it through the tough times. It is now September 14, 1979 Hampton has asked
for an extension to the end December 1979 on the $1 million loan they took out from the St. Louis National Bank at the end of December 1978. The
loan was originally ... Show more content on Helpwriting.net ...
Not paying the dividends is the number one thing Hampton must remove from their current cash budget plan.
They can start to repay some of the principle as soon as possible to reduce the interest payments. This will help reduce the amount of interest paid
in total (Exhibit 2). While this solution does not eliminate the problem of still being unable to repay the full loan, they are able to lessen their cash
shortage. The assumptions I used for this budget was that approximately $500,000 on hand is all they will need from month to month. I also
assumed the $500,000 on hand is not earning interest which would also help generate cash which would help in repayment. The ending cash on
hand for October is $710,000 to help cover for November which has a larger amount of cash outflows then cash inflows. This on it's own would
bring their cash shortage to $319,500 a savings of $12,000. Still this along with the removal of the $150,000 in dividends will still not eliminate their
cash shortage. With the two combined, they still will have a shortage of $169,500. (Exhibit 3)
They can extend the repayment to the future when it will be possible for them to be repaid. I have worked a cash budget out into January of 1980
when they will be able to collect the cash from the large number of orders they expect to finish in December. I made the assumption that the proceeds
from a sale would not be collected until next month since their sales terms are net 30 and most

Torstar Inc.
As the Torstar board meeting in April of 1998 was approaching, a memorandum on Torstar's dividend policy, their repurchases and their strategy with
regards to strategic acquisitions within their three business areas was composed. The memorandum included pros and cons as well as recommendations
with regards to the issues to be discussed when the board gathered for their meeting. The dividend policy and the share repurchase strategy are the main
issues since the institutional shareholders preferred Torstar's historical share repurchases and historical dividend pay outs. Management has during the
last years focused on acquisitions, especially in order to diversify their business through the children's supplementary education products (CSEP) ...
In fact, they could increase their debt to a 50 per cent debt–to–total–assets ratio and still manage their interest payments (interest coverage = 3.017) as
long as they do not suffer sustained decreases in EBIT. Furthermore, Torstar's cash–to–sales ratio is sound at 3.6% which is well above the benchmark
between 0.5% and 2% (Koller et al, 2005). However, according to trade–off theory, as a firm increases their debt–tototal–assets ratio the expected costs
of financial distress will offset the tax shield. It is therefore important to evaluate which level of debt–to–total–assets ratio is optimal. Torstar could face
problems in paying their short–term obligations as well as their long–term obligations. Dividends: A major advantage of Torstar raising the dividends is
that it could mitigate both agency, overconfidence and optimism problems since it reduces the cash available to management. Thus, paying higher
dividends will constrain Torstar's managers from the questionable acquisitions in the CSEP segment. By using dividends, shareholders will gain cash
which they can invest in other public "pure plays", hence the shareholders can diversify their own risk. It is also a way for Torstar to signal stabile
cash flows, increased past earnings and expected sustainable future earnings. The market could however interpret an increase in dividends as if there
are fewer investment opportunities. The market already has the

Payout Policy
Fundamentals of Corporate Finance, 2e (Berk)
Chapter 17 Payout Policy
17.1 Cash Distribution to Shareholders
2) The way a firm chooses between alternate uses of free cash flow is referred to as
A) retention ratio.
B) payout policy.
C) call policy.
D) debt policy.
Answer: B
3) The date on which the board of directors of a company authorizes the dividend is called the ________ date.
A) declaration
B) record
C) ex–dividend
D) distribution
Answer: A
4) The firm will pay the dividend to all shareholders of record on a specific date, set by the board, called the ________ date.
A) declaration
B) record
C) ex–dividend
D) distribution
Answer: B
5) The date two business days prior to the date on which all ... Show more content on Helpwriting.net ...

A) tender offer
B) Dutch auction share repurchase
C) targeted repurchase
D) open market share repurchase
Answer: B
21) A(n) ________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to
sustain such a large sale without severely affecting the price.
A) open market share repurchase
C) tender offer
D) targeted repurchase
Answer: D
22) A(n) ________ is the most common way that firms repurchase shares.
A) targeted repurchase
C) tender offer
D) open market share repurchase
Answer: D
23) Danroy Inc has announced a $5 dividend. If Danroy's last price while trading cum–dividend is $65, what should its first ex–dividend price be
(assuming perfect capital markets)?
A) $60
B) $65
C) $70
D) $75
Answer: A
Explanation: A) $65 – $5 = $60.
24) A firm has assets of $250 million, of which $25 million is cash. It has debt of $100 million. If the firm were to repurchase $10 million of its stock,
what would its new debt–to–equity ratio be?
A) 71.4%
B) 28.6%
C) 80%

D) 20%
Answer: B
Explanation: B) Before Repurchase, Assets = $250,Debt = $100, Equity = $150
After Repurchase, Assets = $240, Debt = $100, Equity = $140
Debt/Equity = $100/$140 = 71.4%
25) What choices does a firm have in using its free cash flow?
Answer: A firm has two choices with its free cash flow. It can decide to

Common Stock Case Study
Common stock is more difficult to value than a bond because the cash flows are uncertain, and the required rate of return in unobservable. The cash
flows to stockholders consist of dividends plus a future sale price. Common stockholders expect to be rewarded through periodic cash dividends and
an increasing share value. Some of these investors decide which stocks to buy and sell based on a plan to maintain a broadly diversified portfolio.
Other investors have a more speculative motive for trading. For instance, they try to spot companies whose shares are undervalued meaning that the
true value of the shares is greater than the current market price. These investors buy shares that they believe to be undervalued and sell shares that they
... Show more content on Helpwriting.net ...
Explain dividend yield and capital gains yield.
The dividend growth model is used to find the value of a stock whose dividend is expected to grow at a constant rate. The three dividend growth models
are, zero–growth, constant growth, and non–constant growth. Since dividends grow at a constant rate, companies use their cost of capital as a
discount rate, and the growth rate of the company must exceed its cost of capital. For example, ABC, Inc. just paid a dividend of $.50. It is expected
to increase its dividend by 2% per year. If the market requires a return of 15% on assets of this risk, the stock would be selling for: P= .50(1+.02)
/ (.15–.02) = $3.92. It's smooth out pattern for constant percentage change each year. Constant percentage change allows for a simplified pricing model.
Dividend yield is the expected dividend per period divided by its current price. Investors buy shares of a company's stock in anticipation of receiving a
return from either or both cash dividends and stock price increases. Capital gains yield is the rate at which the value of an investment grows. For
example, a firm's stock is selling for $10.50. It just paid a $1 dividend and dividends are expected to grow at 5% per year, the required return is: R =
[$1(1.05)/$10.50] +

What Is Dividend Policy?
What is Dividend Policy Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders.
The portion of the earnings that the company gives out are called dividends. A company is expected to pay dividends based on its cash excess and
it long term earning power. A company's management is expected to pay out their surplus earnings in the form of cash dividends or by a share
buyback programme. Although the share buyback programmes and dividends decrease a firm 's retained earnings and pay investors cash, they are
quite different. With a share buyback programme, the company pays cash to the investor by buying back some of its outstanding shares. Companies
can declare both regular and "extra" dividends. Regular dividends usually remain unchanged and pay dividends at regular intervals in the future, but
"extraordinary" or "special" dividends are unlikely to be repeated. According to Miller and Modigliani (1961), the value the shares or returns to an
investor remains unchanged because the dividend they earn is lost in capital appreciation.
Types of dividends:
Cash Dividends: These dividends are paid in cash, usually quarterly. When cash dividends are paid to the investors, the price of the dividend paying
stock decreases by the same price of that of the dividend it pays.
Stock dividend: Shareholders receive new stock form the firm as a form of a dividend. The number of shares the shareholder own in the firm is

The Tax Of A Dividend Tax
A dividend tax is an income tax paid on the earnings from a corporation that is distributed to its shareholders. Dividend payments are treated as
ordinary income, and they are taxed as if the taxpayer had earned income through active work. Presently, there is much controversy surrounding
dividend tax. The government taxes dividends twice: It first taxes corporate income, then taxes the same income again when shareholders receive
dividends paid out of corporate income. The double taxation raises the questions of whether the tax should be eliminated, and which taxes should be cut.
The dividend tax was introduced in 1936 by President Roosevelt in the New Deal (Levey). The Economic Growth and Tax Relief Reconciliation
Act of 2001 introduced lower dividend tax rates (NATP 2001). On May 23, 2003, President Bush signed the Jobs and Growth Tax Relief
Reconciliation Act of 2003, which gained momentum to passing the tax changes, and was supposed to expire in 2008 (NATP 2003). Then on May
17, 2006 the reduced rates were extended an additional two years by the Tax Increase Prevention and Reconciliation Act, into 2010 (NATP 2005).
There are two ways used for the purpose of calculating dividend tax, and they are known as qualified dividends and non–qualified dividends. Qualified
dividends are stocks held more than 60 days during the 121–day period that begins 60 days before the ex–dividend date. These dividends are taxed at 5
percent if the investor is below the 25 percent personal

Linear Technologies Essay
Case 1 Linear Technologies
Group 15
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Three main issues arise when it comes to dividend policy in firms. The first issue is whether dividend is needed or not and the second issue is
regarding which one would be the best option among various payout methods. Lastly, the third issue is about dividend rate. Whether these issues will
affect corporate values has been debated over the years. This paper will talk about such issues through the case study of Linear Technology.
1. Why dividend is needed.
Linear Technology's payout policy, unlike many competitors in the Semiconductor Industry, has a relatively large portion in dividends. Linear has
provided steady dividends ... Show more content on Helpwriting.net ...
Since the firm's stocks are growth stocks, the cash used to repurchase stocks lacks the opportunity of generating high cash flows. Accordingly, the
market price would result in decreased future earnings, EPS, and the firm value of Linear. The number of outstanding shares, instead of the price, will
decrease. While the price of stock would increase just as the amount of cash paid out to repurchase the outstanding stocks. It is important that in both
cases, earnings and earnings per share before the payment are not affected.
3. About the dividend rate
Firms judge the rate of dividend initiations by earnings. However, simply put, if dividend rate changes depending on the change of earnings, the
fluctuation of dividend will increase. This would not be good. Because cutting dividends means uncertain future cash flows. If a company cuts
dividend rate, shareholders will need higher opportunity costs of capital, as a result stock prices will go down. Thus, Linear has retained constantly
increasing dividend rates in small amounts. Under the theoretical assumptions such as M&M, there is no difference whether firms pay out dividends
or not. And if the cost of capital is lower than a firm's ROE, no dividend can raise a firm's value. However, considering the real–life factors, firms
should keep on steady level of dividend rate or repurchasing shares. Repurchasing shares seems to be a better solution. As a

Ford Company Analysis
Case Study: Ford Motor Company's VEP
Question 1
Go ahead with the Value Enhancement Plan
The feature of having both cash and new share options makes the VEP have its strengths and makes an excellence choice for Ford Motor Company.
The cash option solves the problem of Ford having massive amounts of extra cash. Since Ford has no profitable activities for the extensive amounts of
cash, returning the excess cash to shareholders allows them to make profitable investments. Different from a cash dividend, the returned cash will be
taxed as capital gain and therefore achieves tax efficiency for the shareholders. When looking at the company's point of view, they are able to lower
the dividend payment because there will be an increase ... Show more content on Helpwriting.net ...
It would be inefficient for an institutional investor to elect to only the stock option. The reason for this is because the VEP favors the Ford family
members and dilutes the value of an investors voting power. It would be hard to compete with the Ford family even if the investors were to put all
of their $20 cash into buying new common shares. A combination of both cash and stock would be a good option for them as they would have an
opportunity to get part of their investment out of Ford as well as invest in opportunities somewhere else. In a sense, they would not be putting all their
eggs in one basket. They would have a good return on there initial investment if they take part of the $20 as cash.
Outside Shareholder
If I were a regular outside shareholder I would choose the cash option because their main concern is to make a profit while they care less about
voting power. Going with the cash option is a good idea because if I were a shareholder, I would think that Ford has few growth opportunities and
cannot find profitable plans for the future. This would give the shareholders the freedom to do as they desire with the cash and make their own
independent investments. Although the new price of shares would decrease, the shareholders would not bear the loss because the cash they receive
offsets the reduced price. Note that any final decision as an outside shareholder should calculate in the tax

Dividend Policy and Firm Performance: Hotel Reits vs....
Dividend Policy and Firm Performance: Hotel REITs vs. Non–REIT Hotel Companies
Executive Summary. This article investigates whether the greater reliance of real estate investment trusts (REITs) relative to non–REIT corporations
on external equity п¬Ѓnancing suggests greater capital market discipline of REIT management, or greater access to capital, overpaying for assets,
overbuilding and overinvestment. Our analysis is based on a sample of sixteen hotel REITs and п¬Ѓfty–one non–REIT hotel corporations from 1993 to
1999. We examine differences in performance and whether free cash п¬‚ow can explain the differences. The п¬Ѓndings suggest that hotel REITs retain
a signiп¬Ѓcantly smaller amount of free cash п¬‚ow than non–REIT hotel companies. Market ... Show more content on Helpwriting.net ...
Moreover, Nobel and Tarhan (1998) demonstrate improved operating performance for over–investing п¬Ѓrms making larger distribution of cash to
stockholders. These п¬Ѓndings may also be applicable to REITs and the hotel industry. Of particular interest is whether thedividend policy of REITs,
together with their more limited free cash п¬‚ow, mitigate any tendency toward overinvestment in the hotel industry. The interesting empirical
questions, therefore, are the following: Do economies of scales justify the rapid growth of REITs or do REITs suffer from overinvestment? Is п¬Ѓrm
performance related to size and/or organizational form? These questions are addressed by examining the performance of hotel companies, REITs and
non–REITs. The hotel industry provides a direct test of Jensen's (1986) free cash п¬‚ow hypothesis. Given the requirement that REITs distribute 95%
of taxable income to shareholders, we would expect them to be less likely to suffer from agency problems associated with free cash п¬‚ow. In
particular, the capital market should
80 Vol. 7, No. 1, 2001
serve to managers.
discipline
''empire–building''
REIT
The analysis presented in this study is based on a sample of sixteen hotel REITs and п¬Ѓfty–one nonREIT corporations from 1993 to 1999. This period
includes both the REIT boom of the mid–1990s and the REIT ''bust'' of the late 1990s. Non–REIT corporations that invest in hotels and motels serve as
our control group. In this study, we examine whether the

Outline Of The Tax Memorandum Essay
Tax Memorandum #1 Round Table, Inc. and Avalon Corporation have agreed on a straight B
–type reorganization, which will be signed on November
1st, 2015. However, it will not close and take effect until December 31st, 2016, where Round Table will acquire 90% of the issued and outstanding
common stock of Avalon in exchange for commonstock in Round Table. Avalon currently has 1,000 shares outstanding, all of which are voting
common stock, that makeup a $40,000,000 market value ($40,000/share). In addition to the stock for stock agreement, the two entities have engaged in
talks of other transactions that could have an effect on the tax–free makeup of a B–type reorganization. In January 2016, the CEO of Round Table,
Percival, received a cash bonus that he used to acquire 50 shares of Avalon from an unrelated single party. The scope of this specific transaction
merely needs to be analyzed because it is necessary to conclude if it should be a part of the stock for stock exchange that occurs between the two
entities. The transaction is at risk because of its potential to violate the "solely for stock" requirement of a B–type reorganization. There are several
components of Percival's purchase that should be examined to determine whether it would be considered part of the stock for stock exchange, which
could then have an impact on the tax–free nature of the exchange. First, the timing of the transaction is a very important factor in the purchase. Two
months after Round Table agreed

Dividend and Topic
Chapter 14 Questions:
Topic: DIVIDENDS 1.Payments made out of a firm 's earnings to its owners in the form of cash or stock are called: A)Dividends. B)Distributions.
C)Share repurchases. D)Payments–in–kind. E)Stock splits.
Answer: A
Topic: REGULAR CASH DIVIDENDS 2.A cash payment made by a firm to its owners in the normal course of business is called a: A)Share
repurchase. B)Liquidating dividend. C)Regular cash dividend. D)Special dividend. E)Extra cash dividend.
Answer: C
Topic: SPECIAL DIVIDENDS 3.A cash payment made by a firm to its owners as a result of a one–time event is called a: A)Share repurchase.
B)Liquidating dividend. C)Regular cash dividend. ... Show more content on Helpwriting.net ...
A)stock B)normal C)special D)extra E)liquidating
Answer: A
Topic: STOCK SPLITS 15.An increase in the firm 's number of shares outstanding without any change in owners ' equity is called a
_______________. A)special dividend B)stock split C)share repurchase D)tender offer E)liquidating dividend
Answer: B
Topic: TRADING RANGE 18.The difference between the highest and lowest prices at which a stock has traded is called its: A)Average price.
B)Bid–ask spread. C)Trading range. D)Opening price. E)Closing price.
Answer: C
Topic: REVERSE SPLITS 16.In a reverse stock split, __________________________. A)the number of shares outstanding increases, and owners '
equity decreases B)the firm buys back existing shares of stock on the open market C)the firm sells new shares of stock on the open market D)the
number of shares outstanding decreases, but owners ' equity is unchanged E)shareholders make a cash payment to the firm, just the opposite of a cash
dividend

Answer: D
Topic: REGULAR CASH DIVIDEND 17.All else the same, which of the following is a possible consequence of the firm making a regular cash
dividend payment? A)The cash account decreases. B)The additional paid–in capital account decreases. C)The common stock (par value) account
decreases. D)The stock price declines by the amount of the

Essay on Ford value enhacement plan
Ford Value Enhancement Plan (VEP)
In April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm's ownership structure.
Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. In exchange
for each share currently held, the plan would give stockholders one new share plus the choice of receiving $20 in either cash or additional new Ford
common shares. Shareholders electing to receive cash would be taxed on these distributions at capital gain rates. Among other things, the plan provided
a means for the Ford family to obtain liquidity without having to dilute their 40% voting interest (even though they own ... Show more content on
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Exchanging existing share for New Shares on a One for One basis. The VEP includes three options for different kinds of Shareholders:
Option 1: Shareholders who prefer Cash.
Option 2: Shareholders who prefer More Shares
Option 3: Passive Investors
Value Enhancement Plan has tax consequences. Those shareholders electing to receive the new shares of Ford instead of the 20–buck bonus will not
be directly affected by the tax. The new shares are considered a tax–free exchange, with the holding period of the new shares considered the same as
when the original Ford stock was purchased. Shareholders choosing to re–invest in stocks can be incentivized by having more voting power and control
over the management.
Those shareholders choosing to collect the $20 cash per share will have to pay capital gains tax on the cash distribution just as though they have sold
part of their shares. This can be either considered a short–term or long–term capital gain, depending on when your original Ford shares were purchased.
Benefit out of opportunity Cost for the shareholders to invest the $20 in a different firm.
Ford family benefited by retaining their voting control since they did not have to surrender their Class B shares.
Since firms incur the re–purchase option by offering $20 cash for each stock bought back, the number of outstanding shares will be reduced. The
Earnings per share will increase leading to an increased stock price.
Long–term gains (held more than a year) are taxed

Theories Of Cost Theory
Theories: I have highlighted the major financial theories that influence my research. These theories supported my choice of Hypothesis and research
framework. Agency Cost Theory: The dividend policy looks into agency problems between corporate insiders and outside shareholder. Agency
conflicts comes up when there is an agency relationship between people this relationship is a contract under which more than one person engage
another person to perform some service on their behalf which involves giving some decision–making authority to the agent. The agency conflict is a
conflict of interest between corporate insiders (the agents) and outside shareholders (the principals), or in other words between managers and
shareholders. There is good reason to believe that the manager will not always act in the best interest of the... Show more content on Helpwriting.net ...
(Dr). T. Velnampy and J. AloyNiresh wrote an article with topic "The Relationship between Capital Structure & Profitability ". The article focuses
on the fact that an unplanned capital structure could lead to inefficient use of the funds whereas a strategically planned capital structure maximizes
the use of the fund and helps to adapt to economic changes. The authors shows the relationship between the capital structure and profitability of
listed banks of Sri Lanka. Descriptive statistical tools were used to define and summarize the behavior of each variable over the period of time
.The results of the descriptive analysis shows that the mean of debt/equity ratio is 825.2% which indicates that the debt of banks are 8.25 times
more than the total equity which is abnormal in the market as 2 times is perceived to be the maximum ratio for other sectors if the firm is to
maintain a safe position. This shows that banks in Sri Lanka depend heavily on debt rather than equity. This can also be seen from the mean value of
debt to total fund ratio which is 89% which indicates that banks capital structure is made up of 89% of leverage and only 11% of

Essay on Corporate Financial Strategy: Dividend Policy
How to determine the most appropriate dividend policy has become one of the hottest topics in recent years as dividend decisions continue to have a
significant impact on both investment and finance decisions (company's performance overall), affecting financial managers considerations when
deciding how much earnings to reinvest and how much to be paid to shareholders (Watson and Head, 2010). There are already many theories either
supporting or criticising the impact of dividend decisions on a firm's value. Litner (1956) indicated that dividends are paid by mature companies who
have positive earnings instead of smaller firms and managers always target a long–term dividend payout that can be sustained. This essay will critically
evaluate ... Show more content on Helpwriting.net ...
This indicates that the change in EPS may be because of other factors rather than Vodafone's retained earnings. The factor of this result might be
because the share price is incorporated with the information in the capital market.
20132012201120102009
Dividend per share10.19p9.52p8.90p8.31p7.77p
EPS 15.65p13.74p16.75p16.11p17.17p
Still, increase in cash dividends does not always give a good signal to the investors. Particularly when Vodafone increases dividends, the company
reduces the cash flow available to use for investments. This not only suggests that companies might lack of investments opportunities but also
could be a sign of management's failure. However, Modigliani and Miller theory criticised this signalling effect by arguing that dividend policy is
irrelevant to the value of a firm assuming a perfect capital market exists (DeAngelo & DeAngelo, 2006). Any changes in dividend policy made by
firms will not affect the share price. Under this theory, everyone has the same information available in the market; therefore changes in dividends do
not give any signals to market, especially to investors. However, there is a challenge on this theory where the many factors involved in dividend
payout by company such as transactions costs and taxes as well as agency problems. Hence in reality, this theory is not practicable. By contrast they
are agreed that investment policy (but not dividend policy) adopted by companies do affect the

Torstar Case Report
Group–based case report
Torstar Corporation
BUSN81 Theory of Corporate Finance
2011 Autumn
1. Introduction
The case of Torstar Corporation suggests the plan and result of repurchasing its Class B shares in December of 1997. Besides this, the situation of its
business structure, capital structure and expenditures, future plan are also described in the case. Therefore, the purpose of our case study is to state,
analyze and drew to some important conclusions about Torstar Corporation, and try to estimate its power to compete with a new national newspaper. 2.
Background
Torstar Corporation was incorporated on February 6, 1958 and published Canada's largest newspaper Toronto Star. It had two main rivals which are
Sun Media ... Show more content on Helpwriting.net ...
Dividends may force the firm to forgo positive NPV projects or to reply on costly external equity financing * Firms often view dividends as a
commitment to their stockholders and quite hesitant to reduce an existing dividends. Once established, dividend cuts would adversely affect the firm's
stock price as a negative signal
As illustrated by Torstar, a stablecash flow in paying dividends implied a well operating status. The sale of Hebdo provided additional financial
flexibility in 1997, free cash flow increased rapidly as can be seen in Appendix. An extra or special cash dividend and share repurchase are two
choices to payout adequate cash. Special dividend is expressly not intended to be a recurring event, but as mentioned above, paying dividends with the
tax drawback and may produce a negative signal when fluctuating. So keeping the stable payout ratio was a better choice for Torstar.
3.3 Repurchase
Compared with dividend payout, shares repurchase have the listed effects on Torstar Corp, * Send a costly signal to investors that stock of Torstar is a
good investment.
Recent investments seem to cause side–effect on investor's confidence about the company. As mentioned in the article, institutional investors treat
Torstar as a 'pure

Corporate Finance
Table of Content
Executive Summary3
1. Introduction4 1.1 Overview of Harvey Norman Holding Limited4 1.2 Major Competitor5 1.2.1 JB Hi–Fi5 1.2.2 Woolworth5
2. Capital Structures6 2.1 Types of Funding6 2.2 Recent Trends of Leverage7 2.3 Comparison of capital structure with similar companies9 2.4 Capital
expenditures and its financing10 2.5 Important factors influencing the use of debt financing10 2.5.1 Tax Advantage10 2.5.2 Corporate Tax Rate11 2.5.3
Credit rating11 2.5.4 Interest rate11 2.5.5 Company's Industry12 2.5.6 Company's growth rate12 2.5.7 Some other arguments about Harvey Norman12
2.6 Evidence of financial ... Show more content on Helpwriting.net ...
HVN appropriate share price is $4.23 which is $0.12 higher than the actual closing price of $4.11. It is recommended for the investor to purchase
more of the company's share as it was undervalued. The sensitivity analysis shows the theoretical share price is very sensitive to change in WACC.
Careful and continuous observation might be needed to constantly monitor the factors that can alter the WACC such as market return, the company's
beta, risk free rate, and tax rate. D/E ratio can also alter the WACC due to tax benefit on debt. This implies we should keep checking changes of the
company's capital structure, namely its financing decisions and activities because they are important factors to create value of the company.
1. Introduction
1.1 Overview of Harvey Norman Holding Limited
Harvey Norman Holdings Ltd is a public company whose principal activities consist of an integrated franchising, retail, and property entity. As a
franchisor it give franchises to independent business operator and as business owners HVN provide retail product for home and office with different
range of categories such as electrical, computers and communications, small appliances, furniture, bedding and Manchester, home improvements,
lighting, carpet, and flooring. HVN started it business since October 1982 with only one store. For the past 26 years they are experiencing massive
growth. As at 7 Oct 2008, there were 192 franchised complexes around

Question Paper P4 Advanced Financial Accounting

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