Corporate Financial Management: The decision about how much earnings to retain and how much to return to ordinary shareholders as a dividend is a key financial management decision Custom Essay
You will be penalised according to Scheme regulations if you exceed the size limit.
10. The requirements for the assessment
a) The decision about how much earnings to retain and how much to return to ordinary shareholders as a dividend is a key financial management decision.
You are required to:
Discuss the factors that should be considered by the senior managers of a listed company in making a decision on the size of the annual dividend to pay its shareholders.
(10 marks)
b) GLC plc. has just announced an ordinary dividend of 20p per share. The past four years’ dividends per share have been 15p, 17p, 19p and 20p, with the most recent dividend last. Shareholders require a return of 15 per cent.
GLC decides to increase its debt level, thereby increasing the financial risk associated with its equity shares. As a result of this, the company’s shareholders require an increased rate of return to 16.5 per cent.
You are required to:
I. Identify what is a fair price for GLC’s shares prior to the increased debt level?
(10 marks)
II. Calculate what is a fair price for GLC’s shares after the increase in debt?
(5 marks)
III. Discuss any problems with using the dividend growth model as a way of valuing shares and suggest alternative models which could be used to value companies and shares. In this discussion you should also identify any merits and disadvantages of each method.
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