A1. Payout policy (Answer all parts of this question.) (a) , What is the main theorem of Modigliani and Miller regarding the payout policy of firms? Explain. 1 (b) List four assumptions that must hold for the Modigliani-Miller theorem to be valid. (c) Consider a company that has 100 million shares outstanding. The market value of the company is currently at GBP 5 billion. Last year, the company paid out an annual dividend of GBP 2 per share. This year, the company intends to double the dividend to shareholders, but since the company has not enough cash, the company intends to raise the additional money required to pay the dividend in rights issue. i. ( If the price of a new share offered is GBP 25, what is the fair value of a right to buy a new share? Hint: The company first pays the dividends, and then raises the capital. ii. ( ) Contrary to theory, however, as soon as the company announces the rights issue, the share price drops. Why? Think of a reason why this transaction, i.e., financing the dividend payout with a rights issue, could make sense. iii.
A1. Payout policy (Answer all parts of this question.) (a) , What is the main theorem of Modigliani and Miller regarding the payout policy of firms? Explain. 1 (b) List four assumptions that must hold for the Modigliani-Miller theorem to be valid. (c) Consider a company that has 100 million shares outstanding. The market value of the company is currently at GBP 5 billion. Last year, the company paid out an annual dividend of GBP 2 per share. This year, the company intends to double the dividend to shareholders, but since the company has not enough cash, the company intends to raise the additional money required to pay the dividend in rights issue. i. ( If the price of a new share offered is GBP 25, what is the fair value of a right to buy a new share? Hint: The company first pays the dividends, and then raises the capital. ii. ( ) Contrary to theory, however, as soon as the company announces the rights issue, the share price drops. Why? Think of a reason why this transaction, i.e., financing the dividend payout with a rights issue, could make sense. iii.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A1. Payout policy (Answer all parts of this question.)
(a) , What is the main theorem of Modigliani and Miller regarding the payout
policy of firms? Explain.
1
(b)
List four assumptions that must hold for the Modigliani-Miller theorem
to be valid.
(c) Consider a company that has 100 million shares outstanding. The market value
of the company is currently at GBP 5 billion. Last year, the company paid
out an annual dividend of GBP 2 per share. This year, the company intends
to double the dividend to shareholders, but since the company has not enough
cash, the company intends to raise the additional money required to pay the
dividend in rights issue.
i. (
If the price of a new share offered is GBP 25, what is the fair value
of a right to buy a new share?
Hint: The company first pays the dividends, and then raises the capital.
ii. ( ) Contrary to theory, however, as soon as the company announces the
rights issue, the share price drops. Why?
Think of a reason why this transaction, i.e., financing the dividend
payout with a rights issue, could make sense.
iii.
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