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FNCE30002- Midterm Exam Guide - Comprehensive Notes for the exam ( 19 pages long!)


Department
Finance
Course Code
FNCE30002
Professor
C O L E
Study Guide
Midterm

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UniMelb
FNCE30002
MIDTERM EXAM
STUDY GUIDE

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CORPORATE FINANICAL POLICY
DISCUSSION QUESTIONS 4: Payout policy: Forms and influences
Textbook questions
Chapter 11
11th ed: Questions 2, 4, 7 and 8.
12th ed: Questions 6, 17, 10 and 11.
Additional question
On the 17th March 2005 Coles Myer Ltd (which has the ASX code CGJ) issued a news release
providing details of its proposed share buyback scheme. A copy of the news release and a further
media release outlining the end result of the buyback is provided on the next couple of pages. Read
through the media releases and answer the following questions:
(a) How much are Coles Myer looking to spend on the proposed buyback?
(b) What type of buyback is it? (three different types were mentioned in class)
(c) How do shareholders participate in the buyback and what consideration will they receive?
(d) Would an investor be indifferent between receiving the buyback price from the firm itself
rather than from another participant in the market through the ordinary course of buying and
selling?
(e) What was Coles Myer’s motivation for proceeding with the buyback?
(f) What was the end result from the buyback? How many shares were repurchased, what price
was paid per share, and what component of this was treated as a fully franked dividend?
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CORPORATE FINANICAL POLICY
DISCUSSION QUESTIONS 4: Payout policy: Forms and influences - SOLUTIONS
Textbook questions
Question 6
(a) False (also retained earnings).
(b) False. (Short-term capital gains are taxed at income tax rates, but long-term capital gains are
taxed at much lower rates.)
(c) False (most companies use stable divided policy).
(d) True (assuming the company pays dividends and if your personal tax rate is lower than
30%. If higher than 30%, the ATO will collect additional taxes at the personal level).
(e) True.
(f) True.
Question 17
The ways in which the payment of dividends may reduce agency costs are discussed in the text. Two
main roles have been suggested. First, paying higher dividends will, other things being equal,
increase a company’s need to raise capital externally and the capital raising process provides the
opportunity for investors and analysts to monitor a company’s use of resources at relatively low cost.
Second, the payment of dividends can reduce a company’s free cash flows which might be wasted or
invested unprofitably by management.
Question 10
This behaviour is consistent with the proposition that dividends are relevant. In particular, the
behaviour suggests that managers are reluctant to reduce dividends. Possible reasons are the existence
of dividend clienteles, the adverse information content of a reduction in dividends and the desire to
transfer tax credits to shareholders as quickly as possible.
Question 11
The existence of dividend clienteles and the information content of dividends provide possible
reasons for pursuing a stable dividend policy. If a company’s dividends fluctuate wildly, its shares
may not appeal to any clientele of investors.
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