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:
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)
Discuss whether a change in dividend policy will affect the share price of Froste Co.
Explain why Froste Co's capital instruments have different levels of risk and return.
Answers submitted
Created by  Ref  Marking  Action 

b 9590 
8  
a 9210 
7  
b 9216 
8  
c 9222 
5  
c 9220 
5  
a 9206 
7  
b 9212 
8  
a 9030 
7  
a 8366 
7  
a 8254 
7  
a 8256 
7  
b 8266 
8  
c 8270 
5  
a 8260 
7  
b 8268 
8  
c 8274 
5  
b 8262 
8 
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