business theory and practice

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business theory and practice

Intelligent use of information
Creative problem solving
Leadership
Responsible and ethical behaviour
Learning and professional development
Independent High Quality Research
Topic Assignment 2 Part A
Length 1500-2000 words
Weighting 12.5%
Due Date 26 Mar 2014 (Wednesday in Trimester 1 Week 8)
Type of Collaboration Individual Assessment
Marking Criteria Identification, discussion and presentation of key issues
Style and Format Refer Assignment 1
Assessment Submission TBA
Assessment Return To be advised
Detailed Information About nine years ago Haaste PLC, a large and old-established firm,
ceased paying dividends because of its poor financial performance and
mounting losses. Following considerable reorganisation and investment
the firm is now an efficient, profitable and soundly managed
organisation. Consideration is being given to recommencing the payment
of dividends, but when initially discussed at board level, there was no
agreement on the merits of this step. Three main views were expressed:
A stable dividend policy should be introduced as soon as possible
Dividends are irrelevant to shareholders Dividends should be paid only
when the firm has no investment opportunities which promise a return
equal to or greater than that required by shareholders; this situation is
unlikely to arise for several years. (a) Outline, and explain the
importance of, the main points which should be considered when
deciding upon corporate dividend policy. Comment on the three main
views expressed by Haaste’s Board. (b) It is proposed that there be a
change in taxation to a system which penalises corporate retained
earnings and favours distribution of profits, thereby effectively forcing all
companies to distribute all earnings. Examine the implications of such a
change from the viewpoint of (i) corporate financial management, (ii)
shareholders and (iii) the workings of the financial system and financial
institutions

Assessment 3 Authentic Tasks – Other
Graduate Qualities Assessed Understanding business theory and practice
Intelligent use of information
Creative problem solving
Learning and professional development
Independent High Quality Research
Topic Assignment 2 Part B
Length Unspecified

Marking Criteria Accuracy, expression and understanding of concepts
Style and Format To be discussed in class
Assessment Submission TBA
Assessment Return To be advised
Detailed Information Part B – 50 marks
Crumble Ltd and Fall Ltd are two companies in the building industry. The
companies have the same business risk and are almost identical in all
respects except for their capital structures and total market values. The
companies’ capital structures are summarized below:
Crumble Ltd $000
Ordinary shares (25 cents par value)
20,000
Share premium account
45,000
Retained earnings
36,500
Shareholders’ funds
101,500
Crumbles’s ordinary shares are trading at $1.40
Fall Ltd $000
Ordinary shares ($1 par value)
25,000
Share premium account
8,000
Retained Earnings
44,000
Shareholders’ funds
77,000
12% debentures (newly issued)
25,000
102,000

Fall’s ordinary shares are trading at $4, and debentures at $100. Annual


earnings before interest and tax for both companies are $25 million.

Corporate tax is at the rate of 35%.
Required:

(a) Using the arguments of Modigliani and Miller, explain what action you would take to improve your financial position if you owned 4% the ordinary shares of Fall. Estimate by how much your financial position is expected to improve.

(b) Discuss the impact of increasing debt on a company’s cost of capi What implications would this suggest for a company’s choice of

capital structure?

Modigliani and Miller’s theory of capital structure is sometimes considered to be unrealistic. Discuss the problems with this theory that might concern a financial manager who wishes to ascertain the appropriate capital structure for his company.

:)

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