October 2003 QUESTION 1 (a) Funds Available for Dividend Net cash Flows-Investments $2000000-$1500000 500000 (b) Funds Available for Dividend 2000000-$2000000 (c) Funds Available for Dividends 2000000-$3000000 The company should raise an additional sI million through the sale of ord inary shares QUESTION 2 Total financing needed 640000 Retained earnings 400000 Debt ratio per cent Equity ratIo 60 per ce Equity financing needed 384000(60 per cent of s640000) Dividends 16000($40000-$384000) QUESTION 3 =$3.17 $0425$0475$407 Share price planE1180.18)(18≈s317 (a) There is no effect on the value of the ordinary shares (b) An investors preference for current income, tax consequences, information content and transaction costs may change your answerOctober 2003 QUESTION 1 (a) Funds Available for Dividends = Net Cash Flows - Investments = $2 000 000 - $1 500 000 = $500 000 (b) Funds Available for Dividends = $2 000 000 - $2 000 000 = $0 (c) Funds Available for Dividends = $2 000 000 - $3 000 000 = $0 The company should raise an additional $1 million through the sale of ordinary shares. QUESTION 2 Total financing needed $640 000 Retained earnings $400 000 Debt ratio 40 per cent Equity ratio 60 per cent Equity financing needed $384 000 (60 per cent of $640 000) Dividends $16 000 ($400 000 - $384 000) QUESTION 3 ( ) ( ) ( ) ( ) $3.17 1.18 $4.07 1.18 $0.475 1.18 $0.425 Share Price $3.17 1.18 $4.57 1.18 $0.25 1.18 $0.25 Share Price Plan B 2 3 Plan A 2 3 = + + = = + + = (a) There is no effect on the value of the ordinary shares. (b) An investor’s preference for current income, tax consequences, information content, and transaction costs may change your answer