FIN622 Corporate Finance GDB Spring 2020 Solution & Discussion Last Date: 09-06-2020

[+ M.Tariq Malik]

FIN622 Corporate Finance GDB Spring 2020 Solution & Discussion Last Date: 09-06-2020

[+ M.Tariq Malik]

Share the GDB Question & Discuss Here.... 

[Muhammad Azeem]

FIN622 Corporate Finance GDB Spring 2020 Solution & Discussion Last Date: 09-06-2020

Learning outcome:

To help students learn the underlying factor that determines the relationship between retention ratio and current stock price.

 

GDB Statement:

 

Relationship between Retention ratio and Current Stock Price

 

View 1: It is commonly believed in finance literature that such firms which pay all of their earnings in the form of dividend to its shareholders have lower current stock price than those which retain portion of earnings to reinvest in the profitable opportunities available in the business. Although, retaining portion of earnings means less dividend to be distributed among shareholders, but it gives positive signal to shareholders that their invested money is best utilized by the business as reflected by higher current share price. Thus, their return will be maximized by earning higher capital gain on shares owned.

View 2: There is an opposite view that higher dividend payout ratio is inevitable as paying less dividend can drive down the share prices. Higher dividend income gives positive signal to shareholders as they perceive higher share price in a market that ultimately push the stock prices to move upward.

Following table shows the expected dividend stream and retention ratios of companies named as A, B, C, D and E for a next year. Each company has same expected earnings per share i.e. Rs. 10 per share but their dividend payout ratios or retention ratio vary. The companies and their shareholders expect similar required rate of return on their investments which is 15%.

 

 

Requirement:

 

1. You are required to identify and explain the relationship between retention ratio and dividend growth rate by calculating the required values in above table. Provide logical reasoning to support your answer.
2. By examining the impact of retention ratio on current stock price of each company, do you agree with one of the views explained above or not? Provide logical reasoning in either case to support your answer.

 

Special Note:

 

• Your answer should be to the point and must satisfy the question requirement.
• Copied answer or same content with only synonyms changed from any source of internet will straight away be marked zero.

Note:

For acquiring the relevant knowledge watch the course video lectures, consult recommended books, and study additional material available online or in any other mode.

[Muhammad Azeem]

Dear All,

Plz share the solution of GDB Spring 2020 FIN622

[hassan habib]

Need Solution

[arslan]

bhai koi to idea deh de koi???  last date hai pehly supply lagi hwi hai

[Muhammad Azeem]

Sir Tariq sb, Plz share the solutions GDB .... need idea & solution

[sohaib nafees]

Plz solution send ker do

[+ M.Tariq Malik]

FIN622 GDB Solutions

see below links 

FIN622 GDB 1 Spring 2020

Fin622.docx

[Muhammad Azeem]

Sir thanks for great support and GDB solutions... It is very helpful for me to solve the GDB

[hassan habib]

FIN622

GDB

Company Name	Dividend stream	Retention Rate %	Dividend Growth rate(%)	Current Stock Rs
A	10	0	0	66.67
B	8	20	0.03	66.67
C	7	30	0.045	66.67
D	6	40	0.06	66.67
E	5	50	0.075	66.67

Answer

 For Company A

Because the retention rate of company A is Zero that is why the dividend growth rate of Company A Will Also be Zero.

For Company B

Dividend Growth Rate = Retention Rate *E (RRR)

=0.20 * .15

= 0.03

For Company C

Dividend Growth Rate = Retention Rate *E (RRR)

= .30 * .15

= 0.045

For Company D

= .40 * .15

= 0.06

For Company E

Dividend Growth Rate = Retention Rate *E (RRR)

= .50 * .15

= 0.075

 

Current Stock Price

FOR COMPANY A=PO=DIVIDEND OR EPS/R

= 10/0.15

=66.67

FOR COMPANY B=PO=DIVIDEND/R-G)

= 8/(0.15-0.03)

= 66.67

FOR COMPANY C=PO=DIVIDEND/R-G)

= 7/(0.15 – 0.045)

=66.67

FOR COMPANY D=PO=DIVIDEND/R-G)

= 6/(0.15 – 0.06)

= 66.67

FOR COMPANY E=PO=DIVIDEND/R-G)

= 5/(0.15 – 0.075)

= 66.67

JUSTIFICATION

Retention rate and expected rate of return helps of you to determine the dividend rate for the next year as the retained earnings are supposed to reinvest in different profitable available opportunities.

REQUIRMENT 2

CURRENT STOCK PRICE

FOR COMPANY A=PO=DIVIDEND OR EPS/R

= 10/0.15

=66.67

FOR COMPANY B=PO=DIVIDEND/R-G)

= 8/(0.15-0.03)

= 66.67

FOR COMPANY C=PO=DIVIDEND/R-G)

= 7/(0.15 – 0.045)

=66.67

FOR COMPANY D=PO=DIVIDEND/R-G)

= 6/(0.15 – 0.06)

= 66.67

FOR COMPANY E=PO=DIVIDEND/R-G)

= 5/(0.15 – 0.075)

= 66.67

JUSTIFICATION

Retention Policy Is favoreable only when expected rate of return or retention rate is higher than existing one otherwise it has no impact the idea of capital gain null void.

The current stock prices remain same for all companies because expected return 15% is less than the current existing return.