25300 Chapter Notes - Chapter 7: Australian Securities Exchange, Dividend Policy, Issued Shares
7. A company conducts a one-for-four renounceable rights issue at a subscription price of $6 when its
cum-rights price is $9. Calculate the theoretical ex-rights price.
8. Digital Connections Ltd (DCL) is expanding its factory and requires equity finance to allow its
expansion plans to proceed. DCL will conduct a renounceable rights issue to raise the required $10
million funding. DCL presently has 14 million shares issued and their current share price is $8.00. DCL
has set the subscription price to the rights issue at $5.00.
(a) How many shares does a DCL shareholder need to own to receive one right?
(b) What is the value of the rights?
(c) What is the theoretical ex-rights price?
9. R.U.Ready Ltd has an issue of perpetual preference shares outstanding each with a face value of $50
and a fixed dividend rate of 7.6% each year. If investors require a return of 10.5% on the security,
what price would we expect? What would you do if the price on the securities exchange were
$44.53?
10. This year, SAX Ltd. paid a $0.20 dividend per share. The dividend is expected to grow at 5% p.a.
forever. If the required return on SAX shares is 12%, what is the theoretical value for a SAX share?
11. According to the 2018 prospectus of Universal Thermal Sciences Ltd the firm’s planned dividend
policy is to pay no dividends for the next several years due to a substantial R&D program. The firm
anticipates distributing a maiden $0.20 dividend in 2023. This dividend is expected to continue
increasing at a 4% annual rate indefinitely. If the appropriate discount rate is 18%, what is today’s
theoretical share price for UTS (i.e., in 2018)?
12. White Ltd. has just paid a $1.00 dividend. This dividend is forecast to increase by 10% p.a. for the
next three years. After that, dividends are expected to increase at a rate of 4% per year indefinitely.
If the required return is 16%, what is the current value of a share today?
13. Bondi Beachwear Ltd (BBL) shares are listed on the Australian Securities Exchange. Due to poor
trading conditions BBL has not paid a dividend since a $0.50 payment four years ago. BBL has just
announced a restructure and they confidently expect to resume paying dividends two years from
now. The dividend in two years’ time is forecast to be $0.60. In three years the dividend is forecast
to be $0.75 and then predicted to increase at a constant rate of 3% p.a. indefinitely. If the required
rate of return for BBL is 13% p.a., what is a fair value for BBL today?
(Answers: 7. $8.40, 8. (a) 1-for-7, (b) $2.63, (c) $7.63, 9. $36.19; not buy, 10. $3.00, 11. $0.737, 12. $10.08, 13.
$6.34)
Document Summary
A company conducts a one-for-four renounceable rights issue at a subscription price of when its cum-rights price is . Digital connections ltd (dcl) is expanding its factory and requires equity finance to allow its expansion plans to proceed. Dcl will conduct a renounceable rights issue to raise the required million funding. Dcl presently has 14 million shares issued and their current share price is . 00. R. u. ready ltd has an issue of perpetual preference shares outstanding each with a face value of and a fixed dividend rate of 7. 6% each year. What would you do if the price on the securities exchange were. This year, sax ltd. paid a sh. 20 dividend per share. The dividend is expected to grow at 5% p. a. forever. According to the 2018 prospectus of u(cid:374)i(cid:448)ersal ther(cid:373)al scie(cid:374)ces ltd the fir(cid:373)"s pla(cid:374)(cid:374)ed di(cid:448)ide(cid:374)d policy is to pay no dividends for the next several years due to a substantial r&d program.
