Question 2 SECTION 2: Choose two (2) questions from this section (i)Briefly identify and discuss three types of dividend payout policies that may be used (8 marks) by a company and explain M&M dividend irrelevance theory. (ii) Mars company has $1000 in earnings and $900 in planned capital spending. The company has a target D/E ratio of 0.5. If the company reinvests all its earnings, its equity will increase by $1,000. The company must borrow an additional $500 to maintain its target capital structure. Without selling new equity, the amount of funds that can be generated is $1,500. The firm intends to pay dividends since planned capital spending is less than the total amount of capital. Required: a. what type of dividend policy is Mars most likely pursuing? y (2 marks) 3 b. To maintain the target capital structure, show how the planned capital spending will be funded and how much will be available for dividends. (5 marks)
Question 2 SECTION 2: Choose two (2) questions from this section (i)Briefly identify and discuss three types of dividend payout policies that may be used (8 marks) by a company and explain M&M dividend irrelevance theory. (ii) Mars company has $1000 in earnings and $900 in planned capital spending. The company has a target D/E ratio of 0.5. If the company reinvests all its earnings, its equity will increase by $1,000. The company must borrow an additional $500 to maintain its target capital structure. Without selling new equity, the amount of funds that can be generated is $1,500. The firm intends to pay dividends since planned capital spending is less than the total amount of capital. Required: a. what type of dividend policy is Mars most likely pursuing? y (2 marks) 3 b. To maintain the target capital structure, show how the planned capital spending will be funded and how much will be available for dividends. (5 marks)
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:Question 2
SECTION 2: Choose two (2) questions from this section
(i)Briefly identify and discuss three types of dividend payout policies that may be used
(8 marks)
by a company and explain M&M dividend irrelevance theory.
(ii) Mars company has $1000 in earnings and $900 in planned capital spending. The
company has a target D/E ratio of 0.5. If the company reinvests all its earnings, its
equity will increase by $1,000. The company must borrow an additional $500 to
maintain its target capital structure. Without selling new equity, the amount of
funds that can be generated is $1,500. The firm intends to pay dividends since
planned capital spending is less than the total amount of capital.
Required:
a. what type of dividend policy is Mars most likely pursuing?
y
(2 marks)
3
b. To maintain the target capital structure, show how the planned capital spending
will be funded and how much will be available for dividends.
(5 marks)
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