A listed company in a high growth industry, where innovation is a key driver of success
has always operated a residual dividend policy, resulting in volatility in dividends due to
periodic significant investments in research and development.
The company has recently come under pressure from some investors to change its
dividend policy so that shareholders receive a consistent growing dividend. In addition, they
suggested that the company should use more debt finance.
If the suggested change is made to the financial policies, which THREE of the following
statements are true? 

Which of the following would be a reason for a company to adopt a low dividend pay-out
policy?

An entity prepares financial statements to 31 December each year. The following data
applies:
1 December 20X0
• The entity purchased some inventory for $400,000.
• In order to protect the inventory against adverse changes in fair value the entity entered
into a futures contract to sell the inventory for a fixed price on 31 January 20X1.
• The entity designated this contract as a fair value hedge of the value of the inventory.
31 December 20X0
• The inventory had a fair value of $480,000 and the futures contract had a fair value of
$75,000 (a financial liability).
What will be the impact on the statement of profit or loss and other comprehensive income
for the year ended 31 December 20X0 in respect of the change in the value of the
inventory and the futures contract?

Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80%
equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will
be Company B's new cost of equity?

A listed company is planning a share repurchase.
The following data applies:
• There are 10 million shares in issue
• The share repurchase will involve buying back 20% of the shares at a price of $0.75
• The company is holding $2 million cash
• Earnings for the current year ended are $2 million
The Directors are concerned about the impact that this repurchase programme will have on
the company's cash balance and current year earnings per share (EPS) ratio.
Advise the directors which of the following statements is correct?

 A company is deciding whether to offer a scrip dividend or a cash dividend to its
shareholders.
Although the company has excellent long-term growth prospects, it is experiencing shortterm profit and cash flow problems.
Which of the following statements is most likely to be a reason for choosing the scrip
dividend? 

A company wishes to raise new finance using a rights issue. The following data applies:
• There are 10 million shares in issue with a market value of $4 each
• The terms of the rights will be 1 new share for 4 existing shares held
• After the rights issue, the theoretical ex-rights price (TERP) will be $3.80

Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
$ ? million

D has US$10 million to invest over 12 months in either USS or GBP Its options are to
invest in USS at the present USS interest rate of 10 18%. or to convert the USS to GBP at
the spot rate GBP1 =US$1 61 and invest in GBP at an interest rate of 6.4%.
According to the interest rate parity theory, what will the one year forward rate be?
Give your answer to three decimal places.