Foundations Of Finance
Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 13, Problem 7SP

(Practical considerations in setting dividend policy) The board of directors of Kensington Enterprises has decided to pay cash dividends totaling $5 million in the first quarter of the year. This payment represents the initiation of a cash dividend for the first time in company history, and your company CFO has asked you to look into any restrictions or constraints the firm might face in carrying out the plan. Write a brief report outlining the types of restrictions Kensington might face.

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Assume that you are consulting the board of directors for a start-up firm. The firm is expecting small profits and possible losses in the next couple of years, but significant growth over the next 10 years. They have asked your opinion on a dividend policy for the firm.  In your initial post, provide your opinion on a dividend policy along with reasoning using terminology and business factors discussed in this module.
Sarah just received a letter from a major stockholder. Thestock-holder asks about the company’s dividend policy. In fact,the stockholder has asked you to estimate the amount ofdividend that you are likely to pay next year. You have not yetcollected all the information about the expected dividendpayment but you know the following: • The Company follows a residual dividend policy• The total capital budget for next year is likely to beone of three amounts, depending on the results ofcapital budgeting studies that are currently underway.The capital expenditure amounts are P2million,P3million and P4million.• The forecasted level of potential retained earningsnext year is P2million• The target or optimal capital structure is a debt ratio of40%. Compute the amount of dividend (or the amount of newstock needed) and the dividend pay-out ratio for each of thethe three capital expenditure amounts.
You have been asked by your employers to demonstrate your knowledge in business valuation process, by analyzing the value of Best Group Savings and Loans Company (BGSLC). The company paid a dividend of GH¢ 250,000 this year. The current return to shareholders of companies in the same industry as BGSLC is 12%, although it is expected that an additional risk premium of 2% will be applicable to BGSLC, being a smaller and unquoted company. Compute the expected valuation of BGSLC, if: The current level of dividend is expected to continue into the foreseeable future The dividend is expected to grow at a rate 4% par into foreseeable future The dividend is expected to grow at a 3% rate for three years and 2% afterwards
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