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Froste Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is $0.50 per share and it expects that its next dividend per share, payable in one year's time, will be $0.52 per share.

 

The capital structure of the company is as follows:

 

 

$m

$m

Equity

 

 

Ordinary shares (nominal value $1 per share)

25

 

Reserves

       35

 

 

 

        60

Debt

 

 

Bond A (nominal value $100)

20

 

Bond B (nominal value $100)

10

 

 

 

30

 

 

90

Bond A will be redeemed at nominal value in ten years' time and pays annual interest of 9%. The cost of debt of this bond is 9·83% per year. The current ex interest market price of the bond is $95·08. Bond B will be redeemed at nominal value in four years' time and pays annual interest of 8%. The cost of debt of this bond is 7·82% per year. The current ex interest market price of the bond is $102·01. Froste Co has a cost of equity of 12·4%. Ignore taxation.

Requirements:

a

Calculate the following values for Froste Co:

 (i) ex dividend share price, using the dividend growth model;  

(3 marks)

 

(ii) capital gearing (debt divided by debt plus equity) using market values;

(2 marks)

 

(iii) market value weighted average cost of capital.  

(2 marks)

Marks: 7
b

 Discuss whether a change in dividend policy will affect the share price of Froste Co.

Marks: 8
c

 Explain why Froste Co's capital instruments have different levels of risk and return.

Marks: 5

Answers submitted

Created by Ref Marking Action
Abhro Gourab Das's picture
Abhro Gourab Das
09/03/2020 - 22:29
b
9590
8
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/10/2020 - 20:06
a
9210
7
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/10/2020 - 20:32
b
9216
8
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/10/2020 - 21:09
c
9222
5
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/10/2020 - 20:50
c
9220
5
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
06/10/2020 - 20:06
a
9206
7
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
06/10/2020 - 20:27
b
9212
8
Apurba nandy's picture
Apurba nandy
03/03/2020 - 21:18
a
9030
7
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
12/03/2019 - 21:11
a
8366
7
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
12/03/2019 - 21:11
a
8254
7
Apurba nandy's picture
Apurba nandy
11/30/2019 - 01:30
a
8256
7
Apurba nandy's picture
Apurba nandy
11/29/2019 - 18:20
b
8266
8
Apurba nandy's picture
Apurba nandy
11/29/2019 - 18:40
c
8270
5
Masum Billah's picture
Masum Billah
11/29/2019 - 17:58
a
8260
7
Masum Billah's picture
Masum Billah
11/29/2019 - 18:21
b
8268
8
Masum Billah's picture
Masum Billah
11/29/2019 - 18:41
c
8274
5
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/29/2019 - 18:20
b
8262
8