(i) Clientele effect
- Assumes that there is a tendency for him to attract investors who like the firm’s dividend
policy. Therefore investors who desire current investment income would purchase shares
in high dividend payout forms.
- Change in prices after dividend announcement is thus due to demand and supply forces
occasioned by the investors keen on benefiting out of dividend announcement
- The implication of the dividend-clientele effect on dividend policy is that firms establish
dividend policies that they deem would contribute to wealth maximization.
- The shareholders who do not like this policy sell their shares to those keen on driving
dividend benefit.
- On the other hand, because of high switching costs (exit and entry) management is forced
to establish dividend policies that meet investors.
- Investors who want current investment income should own shares in high dividend
payout firms, while investors with no need for current investment income should own
shares in low dividend payout firms.
(ii) Homemade dividend
- Refers to ability of stock holders to liquidate part of their holding hence realize cash
inflow in lieu of dividend income.
- Implication of homemade dividend is that dividend policy is irrelevant and the argument
is that paying or not paying dividend has a capital gain effect: paying dividends lead to an
appreciation in stock values when dividends are not paid, stock prices fall.
- It is possible for investors to create homemade dividends thus the firm may opt to pay
dividend and let investors to choose their own dividend policy. The firm can retain the
profits and plough them through re-investment or can buy back shares.
- It ignores the signaling effect that a declared dividend will name.
Kavungya answered the question on May 5, 2022 at 13:40
- Nazitum Ltd. has current earnings per share of sh. 4.00. The company’s dividend for the previous year was sh. 1.50 per share and it has...(Solved)
Nazitum Ltd. has current earnings per share of sh. 4.00. The company’s dividend for the previous year was sh. 1.50 per share and it has a target payout ratio of 0.60. The management of the company adjusts its dividend over two years.
Required:
The dividend per share for the current year.
Date posted: May 5, 2022. Answers (1)
- Davirex Ltd’s share has a nominal value of sh. 80. The company pays 10% of the nominal value of the share as dividend for the...(Solved)
Davirex Ltd’s share has a nominal value of sh. 80. The company pays 10% of the nominal value of the share as dividend for the year. The current market price of the share is sh. 160 with 15% earnings yield.
Required:
i. Earnings per share.
ii. Dividend cover.
iii. Price – earnings ratio.
Date posted: May 5, 2022. Answers (1)
- Outline four advantages of paying scrip dividends(Solved)
Outline four advantages of paying scrip dividends
Date posted: May 5, 2022. Answers (1)
- Highlight four assumptions necessary for the dividend irrelevance theory to hold.(Solved)
Highlight four assumptions necessary for the dividend irrelevance theory to hold.
Date posted: May 5, 2022. Answers (1)
- The following data was obtained from the financial statements of Nemax Ltd. for the year ended 30 September 2013:
Required:
Using the Lintner's model, determine the dividend...(Solved)
The following data was obtained from the financial statements of Nemax Ltd. for the year ended 30 September 2013:
Required:
Using the Lintner's model, determine the dividend per share (DPS) of Nemax Ltd. for the year ended 30 September 2013.
Date posted: May 5, 2022. Answers (1)
- Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per...(Solved)
Baraka Ltd. has a cost of equity of 10%. Currently, the company has 250,000 shares which are quoted at the securities exchange at Sh.120 per share. The company's earnings per share is Sh.10 and it intends to maintain a dividend pay-out ratio of 50% at the end of the current financial year. The expected net income for the current year is Sh.3 million and the available investment proposals are estimated to cost Sh.6 million.
Required;-
Using the Modigliani and Miller (MM) model, show that the payment of dividends does not affect the value of the firm.
Date posted: May 5, 2022. Answers (1)
- Describe two types of dividends which a corporate entity could pay its shareholders.(Solved)
Describe two types of dividends which a corporate entity could pay its shareholders.
Date posted: May 5, 2022. Answers (1)
- Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its financial statements for the last three years are as follows:(Solved)
Rafiki Hardware Tools Company Limited sells plumbing fixtures on terms of 2/10 net 30. Its financial statements for the last three years are as follows:
Date posted: May 5, 2022. Answers (1)
- Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd.,...(Solved)
Three years ago, Mrs. Rehema Waziri was retrenched from the Civil Service. She invested substantially all her terminal benefits in the shares of ABC Ltd., a company quoted on the stock exchange. The dividend payments from this investment makes up a significant position of Mrs Waziri’s income. She was alarmed when ABC Ltd. dropped its year 2001 dividend to Sh.1.25 per share from Sh.1.75 per share which it had paid in the previous two years.
Mrs Waziri has approached you for advice and you have gathered the information given below regarding the financial condition of ABC Ltd. and the finance sector as a whole.
ABC Ltd. Balance Sheets as at 31 October
Notes:
1. Industry ratios have been roughly constant for the past four years.
2. Inventory turnover, total assets turnover and fixed assets turnover are based on the year-end
balance sheet figures.
Required:
(a) The financial ratios for ABC Ltd for the past three years corresponding to industry ratios given above.
(b) Arrange the ratios calculated in (a) above in columnar form and summarise the strengths and weaknesses revealed by these ratios based on:
(i) Trends in the firm’s ratios
(ii) Comparison with industry averages.
(The summary should focus on the liquidity, profitability and turnover ratios).
Date posted: May 5, 2022. Answers (1)
- The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm...(Solved)
The management of Afro Quatro Ltd. want to establish the amount of financial needs for the next two years. The balance sheet of the firm as at 31 December 2001 is as follows:
Date posted: May 5, 2022. Answers (1)
- Madawa Chemicals Ltd. is in the process of forecasting its financial needs for the coming year ending 31 October 2003. The company attained a turnover...(Solved)
Madawa Chemicals Ltd. is in the process of forecasting its financial needs for the coming year ending 31 October 2003. The company attained a turnover ofSh.300 million for the current year ended 31 October 2002.
The following are the summarized financial statements of the company for the year ended 31 October 2001:
From past experience, it has been disclosed that each additional Sh.1 of sales made by the company
requires, on average, a total investment in fixed assets, stocks and debtors of Sh.1.50. The Sh.1
additional sales also results in the generation of automatic financing of 40 cents as various creditors
spontaneously arise with the increase in sales.
The net profit margin after tax and the dividends payout ratio which apply for the year ended 31
October 2002 will also be relevant into the foreseeable future.
Required:
a) The amount of external finance that will be needed during the year ending 31 October
2003 if sales are expected to increase by 15% in the year.
b) The maximum expected sales growth that can be achieved in the year ending 31
October 2003 if only internally generated funds are used.
(c) The maximum growth in sales that can be achieved in the year ending 31 October 2003 if the
company wishes to maintain its current level of financial gearing.
(d) Briefly comment upon the weaknesses of the method of forecasting used above.
Date posted: May 5, 2022. Answers (1)
- The following information represents the financial position and financial results of AMETEX limited for the year ended 31 December 2002.(Solved)
The following information represents the financial position and financial results of AMETEX limited for the year ended 31 December 2002.
Additional Information
1. The company’ ordinary shares are selling at sh. 20 in the stock market
2. The company has a constant dividend payout of 10%
Required:
i) Acid test ratio
ii) Operating Ratio
iii) Return on total capital employed
iv) Price earnings ratio
v) Interest coverage ratio
vi) Total assets turnover
Determine the working capital cycle for the company.
Date posted: May 5, 2022. Answers (1)
- Pokea Cellphone Operators Ltd. started operations on 1 September 2002. The company raised the required equity capital of Sh.65million and debt at an annual rate...(Solved)
Pokea Cellphone Operators Ltd. started operations on 1 September 2002. The company raised the required equity capital of Sh.65million and debt at an annual rate of interest of 18% before commencing business. Given below are some statistics extracted from the books of the company in respect to the financial statements prepared to 31 August 2003
Required:
a) In respect of the year ended 31 August 2003, you are required to prepare the company’s:
i) Trading Profit and Loss account
ii) Balance Sheet
b) The following statistics have been provided with respect to the industry in which the company operates:
Acid test ratio 1.2:1
Return on equity 21%
Capital gearing ratio 36%
Required:
Comment on the performance of the company relative to these industry statistics
Date posted: May 5, 2022. Answers (1)
- Ushindi Limited presented the following financial statements on 30 June 2004
Additional Information
1. An analysis of the industry in which the company operates reveals the following...(Solved)
Ushindi Limited presented the following financial statements on 30 June 2004
Additional Information
1. An analysis of the industry in which the company operates reveals the following industrial
average
Current Ratio 1:5:1
Quick Ratio 0:8:1
2. The purchases for the year were Sh. 2,160,000 while the cost of sales was Sh. 3,000,000.
3. The market price of the company’s shares as at 30 June 2004 was Sh. 5
Required:
a) Compute the following ratios for Ushindi Limited
i) Return on capital employed
ii) Turnover of capital
iii) Operating expenses ratio
iv) Accounts receivable turnover in days
v) Dividend yield
vi) Price earnings ration
vii) Market value to book value ration
viii) Current ratio
b) Compare the company’s liquidity performance with that of the industry.
Date posted: May 5, 2022. Answers (1)
- Mijengo Ltd. And Vyumba ltd are medium-sized companies dealing in the sale of new residential houses. The following information was extracted from the financial records...(Solved)
Mijengo Ltd. And Vyumba ltd are medium-sized companies dealing in the sale of new residential houses. The following information was extracted from the financial records of the two companies for the year ended 31st December 2005:
Required:
i) Gearing ratio for each company
ii) Earnings per share for each company
iii) Price earnings ratio for each company
iv) Interpret your result obtained in (i) and (ii) above
Date posted: May 5, 2022. Answers (1)
- The following is an extract of the balance sheet of Shauri Moyo limited as at 31 December 2005(Solved)
The following is an extract of the balance sheet of Shauri Moyo limited as at 31 December 2005
Date posted: May 5, 2022. Answers (1)
- The earnings yields of excel Ltd. is 20% and the current market price per ordinary share is Sh100.
Each Share has a par value of Sh.50....(Solved)
The earnings yields of excel Ltd. is 20% and the current market price per ordinary share is Sh100.
Each Share has a par value of Sh.50. The dividend for the current year is expressed as 10% of the par value.
Required:
i) The earnings per share
ii) The dividend cover
iii) The price earnings ratio
Date posted: May 5, 2022. Answers (1)
- The following balance sheet was prepared by the management of Mambo Ltd. as at 31 December 2007.(Solved)
The following balance sheet was prepared by the management of Mambo Ltd. as at 31 December 2007.
The management of the company is evaluating the expected financial requirements for the year
ending 31 December 2008 and has sought your advice as a financial consultant.
The following additional information has been provided to you:
1. Sales revenue for the year ended 31 December 2007 was sh. 20 million while the projected
sales revenue for the year ending 31 December is sh. 24 million.
2. Total assets and current liabilities for year 2008 are expected to increase in the same proportion
as the increase in sales revenue.
3. The average after tax net profit margin of 8% per annum is expected to be maintained in year 2008.
4. The current dividend payout ratio of 70% is also expected to be maintained in the year 2008.
5. Any additional finance required in year 2008 would be obtained through bank loans.
Required:
i) The amount additional long term required in year 2008, if any, to finance the expected increase
in net assets.
ii) Projected balance sheet of the company as at 31 December 2008.
Date posted: May 5, 2022. Answers (1)
- The following summarized financial statements relate to Jasmine Ltd. for the year ended 31 October 2008.
The company is in the process of preparing a financial...(Solved)
The following summarized financial statements relate to Jasmine Ltd. for the year ended 31 October 2008.
The company is in the process of preparing a financial budget for the year ending 31 October 2009.
Additional information:
1. From past experience, the management of the company have determined that for each sh. 1.00
of additional sales, total investment of sh. 1.50 in fixed assets, stock and debtors would be
required.
2. The management have also determined that for each sh. 1.00 of additional sales, the company
would require trade credit amounting to sh. 0.60.
3. The company has maintained a constant dividend payout ratio.
4. Any requirements for internal funds are to be met from the retained earnings for the year
ending 31 October 2009.
Required:
i) External finance (if any ) required in year 2009 assuming that the sales for the year increase
by 20%
ii) Expected maximum growth in sales in year 2009 assuming that the company only utilizes
internal funds.
iii) Briefly explain three limitations of your estimates in (b) (i) and (ii) above.
Date posted: May 5, 2022. Answers (1)
- Sunrise Limited presented the following financial statements for the year ended 31 December 2008:(Solved)
Sunrise Limited presented the following financial statements for the year ended 31 December 2008:
Assume a 360 – day year.
Required:
i) Operating cash style
ii) Quick ratio
iii) Current ratio
iv) Debt to equity ratio
v) Operating margin ratio
vi) Debt turnover ratio
Date posted: May 5, 2022. Answers (1)