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Attempt TWO of the following questions

Accounting

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Attempt TWO of the following questions. Each question that is attempted will carry a maximum mark of 50%.

 

Question 1

Within the current body of academic research conflicting evidence has been produced as to whether an optimal capital structure does indeed exist for individual companies and businesses. Demonstrating knowledge and understanding of the differing theoretical viewpoints associated with capital structure, and incorporating relevant empirical findings, critically evaluate and analyse whether financial managers can strive for an optimal capital structure.

 

In this section students should demonstrate understanding, knowledge, and an ability to critically evaluate the differing theoretical viewpoints associated with differing capital structure models. The response should attempt to incorporate a critical perspective through relevant academic referencing, rather than overly describing the differing models. Attempting to evaluate within a practical, real-life business context through investigation of academic empirical findings will assist in developing the response. The inclusion and development of relevant numerical examples with supporting analysis would be beneficial although this aspect should not form the main basis of the work.

 

TOTAL (50 Marks)

 

Question 2

ABC Ltd has provided the following figures for two investment projects, only one of which may be chosen.

Project X                                         Project Y

£                                                                £

Initial outlay                                                                              200,000                                                        180,000

Profit for year   1                                                                      20,000                                             10,000

2                                                                      30,000                                        10,000

3                                                                      20,000                                        40,000

4                                                                      15,000                                        20,000

Estimated resale value at end of year 4               40,000                                            60,000

Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 8%.

Required

a) Calculate for each project

i. Payback

ii. Return on Capital Employed

iii. Net present value (NPV) (20 marks)

 

b) Critically discuss the merits and limitations of payback and NPV (18 marks)

(Your answer has to be presented in an essay format)

c) Explain which project you would recommend for acceptance (4 marks)

 

d) Discuss when you would use Weighed Average Cost of Capital and the problems associated with the practical and calculating it. (8 Marks)

TOTAL (50 Marks)

 

Question 3

It is 31 January 2020 and the managers of ABC Plc. are considering a change in the company’s dividend policy. Earnings per share for 2019 for the company were 50p, and the finance director has said that he expects this to increase to 55p per share for 2020. The increase in earnings per share is in line with market expectations of the company’s performance. The pattern of recent dividends, which are paid on 31 December is as follows:

 

Year	2019	2018	2017	2016	2015	2014
Dividend per Share (pence)	25	22.7	20.6	19.2	17.6	16.2

 

The managing director has proposed that 65 per cent of earnings in 2019 and subsequent years should be retained for investment in new product development. It is expected that, if this proposal is accepted, the dividend growth rate will be 11.25 per cent. ABC’s cost of capital is estimated to be 15 per cent.

 

Calculate the share price of ABC in the following circumstances.

 

1. The company decides not to change its current dividend policy. (9 marks)
2. The company decides to change its dividend policy as proposed by the managing director and announces the change to the market. (6 marks)

(c) Does the dividend policy adopted by a company impact upon the market value of that company? Academic findings within this area have provided conflicting evidence with two distinct theoretical schools of thought; one supporting dividend relevance and the other dividend irrelevance. Critically analyse and evaluate the differing theoretical viewpoints, ensuring the response is developed through incorporating relevant academic research that has been performed within this area.                (35 marks)

  

                                                  TOTAL (50 Marks)

 

In this section students should demonstrate knowledge, understanding, and an ability to critically evaluate and analyse the main dividend relevance and irrelevance theoretical viewpoints. The response should be developed through use of a wide range of relevant academic literature, referenced as per Harvard referencing requirements. The inclusion and ability to integrate real-life practical business examples, addressing whether differing companies adopt a dividend relevance or irrelevance standpoint would assist in developing the response in greater depth.  

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