Topic: Dividend policy in multinationals and transfer pricing

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 14 Marks

AFM – Nov 2016 – L3 – Q2a – Dividend policy in multinationals and transfer pricing

Advise on factors affecting dividend policy and calculate GGML’s dividend capacity and payout ratio for the next three years.

You are the newly employed Finance Director of Gala Gold Mining Ltd (GGML), a fast
growing Ghanaian mining company. The ordinary shares of GGML are listed on the Ghana
Stock Exchange. The company issued two million fresh shares in an Initial Public Offer (IPO)
to meet the minimum public shareholding requirement of the Exchange. In the prospectus
accompanying the IPO, the company proposed a stable earnings pay-out ratio of 20%.
It has been one year since the listing of GGML’s ordinary shares. At the first post-listing annual
general meeting, which was held last week, the directors recommended that the company
retains the entire profit earned in its first year as a public company to help finance profitable
mining opportunities in the Western part of Ghana. This 100% earnings retention proposal was
rejected by the shareholders, and the directors have promised to reconsider the issue and
recommend some dividends.
The directors would be meeting in the coming month to discuss the matter with the hope of
developing a sustainable dividend policy for the next three years. You are expected to make a
presentation on the company’s dividend capacity at the meeting.
You have gathered relevant extracts from the financial results of the past financial year (i.e.
financial year ending June 2015) and expected annual changes in the values over the next three
years (i.e. financial years ending June 2016, 2017 and 2018) presented in the Table below :

The company’s tax rate is expected to remain at 35%.
Required:
i) Advise the directors on THREE factors they should consider in developing an appropriate
dividend policy for GGML. (6 marks)
ii) Calculate the maximum dividends GGML can pay for the past financial year, and estimate
its dividend capacity for the next three years. Recommend an appropriate dividend payout ratio for the coming three financial years.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2016 – L3 – Q2a – Dividend policy in multinationals and transfer pricing"

  • 12 Marks

AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions

Evaluate the financing options for Asana Ltd’s expansion, calculate the value of a right, dividend capacity, and debt-to-equity ratio under different methods.

Asana Ltd (Asana) is a manufacturing company based in Ghana. It is listed on Ghana’s stock exchange with a total market capitalization of GH¢400 million and 50 million shares outstanding. Its debt stock is made up of 10,000 18% bonds with a face value of GH¢100 each. Per the bond indenture, Asana is required to maintain a maximum debt-to-equity ratio of 80% and is prohibited from paying a dividend in any year unless its dividend capacity for that year is at least 45% of net income for that year. For the past three years, the company has not been able to pay dividends to its shareholders because it has not been able to meet the minimum dividend capacity requirement.

Presently, the company is planning an expansion project that could enhance its dividend capacity for the coming years. The expansion project is expected to increase profit before interest and tax by 15% above the recent figure of GH¢35 million. The directors are considering whether to use equity or debt finance to raise the GH¢50 million required by the expansion project. The amount required for the business expansion will be invested in additional property and equipment. Details of the two financing methods under consideration follow:

Method 1: Equity Finance
If equity finance is used, Asana will offer 1 new share for every 4 existing shares in a rights offer at a discount of 10% off the current market price.

Method 2: Debt Finance
If debt finance is used, Asana will raise the required GH¢50 million through a syndicated loan arrangement. The interest rate on this syndicated loan is expected to be 20%. It is assumed that the entire principal will be drawn immediately and paid back in a lump sum in 5 years’ time.

Additional information:

  1. Presently, the book value of equity is GH¢200 million, while the debt level is GH¢100 million.
  2. The recent profit before interest and tax is reported after charging depreciation of GH¢10 million and profit on disposal of non-current assets of GH¢2 million. The aggregate cost of the non-current assets sold is GH¢10 million, and their aggregate accumulated depreciation is GH¢8 million.
  3. In addition to the business expansion expenditure, GH¢2 million will be invested to maintain existing productive capacity in the coming year. This will be financed from retained earnings.
  4. Additional investment in net working capital will be 20% of the current net working capital balance of GH¢100 million.
  5. Asana pays corporate income tax at 22%.

Required:

i) Supposing equity finance is used, compute the value of a right.
(2 marks)

ii) Forecast the dividend capacity of Asana under both financing methods after the business expansion. Conclude whether Asana would be able to pay dividends to its shareholders in the coming year.
(5 marks)

iii) Compute the revised debt-to-equity ratio of Asana under both financing methods after the business expansion.
(3 marks)

iv) Use the results of the calculations above to evaluate whether equity or debt finance should be used for the planned business expansion.
(2 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions"

  • 8 Marks

AFM – Nov 2017 – L3 – Q5b – Dividend policy in multinationals and transfer pricing

Discusses the factors that affect dividend repatriation policies in multinational companies.

The amount of dividends subsidiaries pay to the parent company depends on the parent company’s dividend policies. Dividend repatriation represents significant flow for parent companies and contributes to dividend payments.

Required:
Discuss FOUR factors that affect dividend repatriation policies of Multinational Companies. (8 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2017 – L3 – Q5b – Dividend policy in multinationals and transfer pricing"

  • 10 Marks

AFM – May 2018 – L3 – Q5a – Dividend policy in multinationals and transfer pricing

Discussing why share prices plunge when multinational companies suspend paying dividends and outlining theories of dividend policy.

Recently, some multinational companies have suspended paying dividends. If, as some say, dividends are irrelevant, why have share prices plunged in most of these companies?

Required:
In your answer, outline both dividend policy theory and relevant examples.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2018 – L3 – Q5a – Dividend policy in multinationals and transfer pricing"

  • 14 Marks

AFM – Nov 2016 – L3 – Q2a – Dividend policy in multinationals and transfer pricing

Advise on factors affecting dividend policy and calculate GGML’s dividend capacity and payout ratio for the next three years.

You are the newly employed Finance Director of Gala Gold Mining Ltd (GGML), a fast
growing Ghanaian mining company. The ordinary shares of GGML are listed on the Ghana
Stock Exchange. The company issued two million fresh shares in an Initial Public Offer (IPO)
to meet the minimum public shareholding requirement of the Exchange. In the prospectus
accompanying the IPO, the company proposed a stable earnings pay-out ratio of 20%.
It has been one year since the listing of GGML’s ordinary shares. At the first post-listing annual
general meeting, which was held last week, the directors recommended that the company
retains the entire profit earned in its first year as a public company to help finance profitable
mining opportunities in the Western part of Ghana. This 100% earnings retention proposal was
rejected by the shareholders, and the directors have promised to reconsider the issue and
recommend some dividends.
The directors would be meeting in the coming month to discuss the matter with the hope of
developing a sustainable dividend policy for the next three years. You are expected to make a
presentation on the company’s dividend capacity at the meeting.
You have gathered relevant extracts from the financial results of the past financial year (i.e.
financial year ending June 2015) and expected annual changes in the values over the next three
years (i.e. financial years ending June 2016, 2017 and 2018) presented in the Table below :

The company’s tax rate is expected to remain at 35%.
Required:
i) Advise the directors on THREE factors they should consider in developing an appropriate
dividend policy for GGML. (6 marks)
ii) Calculate the maximum dividends GGML can pay for the past financial year, and estimate
its dividend capacity for the next three years. Recommend an appropriate dividend payout ratio for the coming three financial years.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2016 – L3 – Q2a – Dividend policy in multinationals and transfer pricing"

  • 12 Marks

AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions

Evaluate the financing options for Asana Ltd’s expansion, calculate the value of a right, dividend capacity, and debt-to-equity ratio under different methods.

Asana Ltd (Asana) is a manufacturing company based in Ghana. It is listed on Ghana’s stock exchange with a total market capitalization of GH¢400 million and 50 million shares outstanding. Its debt stock is made up of 10,000 18% bonds with a face value of GH¢100 each. Per the bond indenture, Asana is required to maintain a maximum debt-to-equity ratio of 80% and is prohibited from paying a dividend in any year unless its dividend capacity for that year is at least 45% of net income for that year. For the past three years, the company has not been able to pay dividends to its shareholders because it has not been able to meet the minimum dividend capacity requirement.

Presently, the company is planning an expansion project that could enhance its dividend capacity for the coming years. The expansion project is expected to increase profit before interest and tax by 15% above the recent figure of GH¢35 million. The directors are considering whether to use equity or debt finance to raise the GH¢50 million required by the expansion project. The amount required for the business expansion will be invested in additional property and equipment. Details of the two financing methods under consideration follow:

Method 1: Equity Finance
If equity finance is used, Asana will offer 1 new share for every 4 existing shares in a rights offer at a discount of 10% off the current market price.

Method 2: Debt Finance
If debt finance is used, Asana will raise the required GH¢50 million through a syndicated loan arrangement. The interest rate on this syndicated loan is expected to be 20%. It is assumed that the entire principal will be drawn immediately and paid back in a lump sum in 5 years’ time.

Additional information:

  1. Presently, the book value of equity is GH¢200 million, while the debt level is GH¢100 million.
  2. The recent profit before interest and tax is reported after charging depreciation of GH¢10 million and profit on disposal of non-current assets of GH¢2 million. The aggregate cost of the non-current assets sold is GH¢10 million, and their aggregate accumulated depreciation is GH¢8 million.
  3. In addition to the business expansion expenditure, GH¢2 million will be invested to maintain existing productive capacity in the coming year. This will be financed from retained earnings.
  4. Additional investment in net working capital will be 20% of the current net working capital balance of GH¢100 million.
  5. Asana pays corporate income tax at 22%.

Required:

i) Supposing equity finance is used, compute the value of a right.
(2 marks)

ii) Forecast the dividend capacity of Asana under both financing methods after the business expansion. Conclude whether Asana would be able to pay dividends to its shareholders in the coming year.
(5 marks)

iii) Compute the revised debt-to-equity ratio of Asana under both financing methods after the business expansion.
(3 marks)

iv) Use the results of the calculations above to evaluate whether equity or debt finance should be used for the planned business expansion.
(2 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions"

  • 8 Marks

AFM – Nov 2017 – L3 – Q5b – Dividend policy in multinationals and transfer pricing

Discusses the factors that affect dividend repatriation policies in multinational companies.

The amount of dividends subsidiaries pay to the parent company depends on the parent company’s dividend policies. Dividend repatriation represents significant flow for parent companies and contributes to dividend payments.

Required:
Discuss FOUR factors that affect dividend repatriation policies of Multinational Companies. (8 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – Nov 2017 – L3 – Q5b – Dividend policy in multinationals and transfer pricing"

  • 10 Marks

AFM – May 2018 – L3 – Q5a – Dividend policy in multinationals and transfer pricing

Discussing why share prices plunge when multinational companies suspend paying dividends and outlining theories of dividend policy.

Recently, some multinational companies have suspended paying dividends. If, as some say, dividends are irrelevant, why have share prices plunged in most of these companies?

Required:
In your answer, outline both dividend policy theory and relevant examples.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2018 – L3 – Q5a – Dividend policy in multinationals and transfer pricing"

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@nbcinstitute.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope
error: Content is protected !!
Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan