Assignment Task:
Task:
Further Information on Rose plc
Need Help Writing an Essay?
Tell us about your assignment and we will find the best writer for your paper.
Get Help Now!The ordinary shares of Rose plc has a nominal value of €1 per share and a current ex- dividend market price of €6·10 per share. A dividend of €0·90 per share has just been paid.
The 6% preference shares of Rose plc have a nominal value of €0·75 per share and an ex- dividend market price of €0·64 per share.
The 8% loan notes of Rose plc have a nominal value of €100 per loan note and a market price of €103·50 per loan note.
Annual interest has just been paid and the loan notes are redeemable in five years’ time at a 10% premium to nominal value.
The bank loan has a variable interest rate.
The risk-free rate of return is 3·5% per year and the equity risk premium is 6·8% per year.
Rose plc has an equity beta of 1·25.
Rose plc pays corporation tax at a rate of 20%.
Investment in facilities
Rose plc’s board is looking to finance investments in facilities over the next three years, forecast to cost up to €27m. The board does not wish to obtain further long-term debt finance and is also unwilling to make an equity issue.
This means that investments have to be financed from cash which can be made available internally by using the profits. Board members have made a number of suggestions about how this can be done:
Director A (Andrew) has suggested that the company does not have a problem with funding new investments, as it has cash available in the reserves of €29m. If extra cash is required soon, Rose plc could reduce its investment in working capital and use the money they have put aside for the day-to-day activities of the business.
Director B (Brian) has suggested borrowing €10m or raising €10m in shares and also use €17m of their cash to pay the investment and pay €2m in a dividend.
Director C (Colin) has commented that although a high dividend has just been paid, dividends could be reduced over the next three years, allowing spare cash for investment.
Colin would prefer not to eliminate all the cash of the business as this is needed for day-to- day activities and his concern is it will cause liquidity issues. He is concerned not paying a dividend might have an impact on the market value of the shares once announced.
Requirement:
(a) Calculate the cost of the ordinary shares
(b) Calculate the cost of the preference shares
(c) Calculate the cost of the loan notes
(d) Discuss the views expressed by the three directors on how the investment should be financed and the impact on their choices.
Note: Students should include Liquidity, Shareholder Expectations, Gearing, Risk, impacts of the overall company and impacts to shareholders. Calculate ratios where you feel appropriate.
(e) Consider the scenario where Rose plc announce that they are not paying a dividend in 2021. The current share price is €6.10. Analyse what might happen to this share price as a result of this news, citing the theory that backs up your opinion.
Provide researched analysis on a company that you are familiar with to back up your claims.
(f) From a company you are familiar with discuss the impact their dividend policy has on their share price.
Include: background to the company, the initial share price.
(g) Based on the information above discuss the impact of one external economic factor the directors need to consider before proceeding with the investment and deciding on a dividend policy.
Marking Scheme
For maximum marks students are expected to carry out in-depth research and critically evaluate their opinions
Marking scheme:
(a) Calculate the cost of the ordinary shares. 5%
(b) Calculate the cost of the preference shares 5%
(c) Calculate the cost of the loan notes. 15%
(d) Assess the views expressed by the three directors 30%
(e) Impact on share price and back up research 10%
(f) Impact on dividend policy on company researched 15%
Welcome to Our Online Academic Writing Service. Our online assignment writing website provide various guarantees that will never be broken. No matter whether you need a narrative essay, 5-paragraph essay, persuasive essay, descriptive essay, or expository essay, we will provide you with quality papers at student friendly price.
Ask for Instant Writing Help. No Plagiarism Guarantee!
