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 8254 |
7 | ||
a 8366 |
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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