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PDS Ltd is a medium sized company quoted on the stock exchange. The company’s year-end is 31 December. The following data relate to the company’s...

      

PDS Ltd is a medium sized company quoted on the stock exchange. The company’s year-end is 31 December. The following data relate to the company’s earnings per share (EPS) and dividend per share (DPS) for the last five years.
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If the current dividend policy is maintained, the directors of PDS Ltd. expect that annual growth in earnings and dividend will be the same as the average growth in earnings over the past four years. PDS Ltd., which is wholly equity financed, is reluctant to obtain debt to finance its growth opportunities. The company is therefore considering a change in its dividend policy where 50% of its earnings will be retained to finance identified projects which are estimated to have an average post-tax
return of 15%.
The company's cost of capital is 12%.

Required;-
The share price of the company which might be expected by the market
(i) If the company does not announce the change of dividend policy.
(ii) If the company announces the change of dividend policy.

  

Answers


Kavungya
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Kavungya answered the question on May 5, 2022 at 13:50


Next: Explain the arguments in favour of a stable dividend policy.
Previous: Outline the reasons that may constrain a company from paying dividends to its shareholders at the end of a financial year.

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