Answer to Question #294492 in Management for john k

Question

Mubita and Tembo are evaluating the prospects of investing in a new little known firm

which just paid dividends of K3 per share. A. Mubita and Tembo have examined the

prices of similar stocks in the market and found that they provide 12% expected return.

Mubita is projecting that dividends for this firm will grow at the rate of 4% indefinitely.

Tembo is projecting that the dividends of the firm will grow at a rate of 10% for the next

two years, after which the growth rate is expected to decline to 3% indefinitely.

A. Find the intrinsic value of the stock of the firm according to Mubita and Tembo’s

forecasts.

B. If the stock of this firm is currently trading at K40 per share, what do you think

would be the investment decisions of Mubita and Tembo as far as committing their

money on this stock is concerned?

C. From a managerial point of view, discuss any five (5) factors that would influence

the dividend policy of any firm.

Answer 1

a). Intrinsic value of stock of a firm

$=$ Value of business$/$ outstanding shares of the firm.

$=k40$ per share $/$ $k3$ per share.

$=13.33$ per share.

$=$ $13.33$

b). The investment decision of Mobita and Tembo if the trading price per share at K40 would be that the would invest more money. This is because at that price per share, they would eventually reap big in terms of dividends.

c). Factors that would influence dividend policy.

1. Financial needs- a company that needs more of funds will lower the amount of dividends that it would pay its partners so that it can remain afloat.

2. Legal restrictions- the government may impose certain percentages to be followed by partnerships when calculating the amount of dividends it would pay.

3. Liquidity. This refers to how fast the dividends may be turned into cash by the firm. If it's urgent, then the dividends paid are smaller as compared to when it is not urgent.

4. Access to capital markets- if the markets are easily accessible, then the amount of dividends paid is more as compared to when the markets aren't easily accessible.

5. Stability of earnings- if the returns are stable, the firm is able to calculate with certainty the amount of dividends as compared to when earnings are fluctuating.