ANSWERS 8a: The statement not necessarily be true. Let us take 2 companies; High dividend pay out company –100% payout Low dividend payout company – 20% payout a) Less retained earnings b) Slower / lower growth rate c) Lower market price d) Cost of equity (Ke) > IRR (r = rate of return earned by company on its investment. e) Indicates that company is decli ning. a) More retained earnings b) Accelerated/higher growth rate c) Higher market price d) Cost of equity (Ke) < IRR (r = rate of return earned by company on its investment. e) Indicates that company is growing. It must be noted that, dividend is a trade -off between retaining money for capital expenditure and issuing new shares. Answer 8b: The statement is false. An investor gains bonus shares at zero cost, However, the market price of the stock will come down & over the long period, the investor definitely maximizes his wealth due to bonus shares. From company angle, bonus issue is only an accounting entry & it doesn’t change the wealth/value of the firm. Recently, Bharti Airtel have issued bonus share 2:1, due to which, the investors have gained Bonus shares at zero cost & the market have come down to the extent of bonus issue & immediately went up & investors have cashed the bonus shares thus maximized their wealth. However, currently it is trading down due to varied reasons.
d) Cost of equity (Ke) < IRR (r = rate of return earned by
company on its investment.
e)Indicates that companyis growing.
It must be noted that, dividend is a trade -off between
retaining money for capital expenditure and issuing new
shares.Answer 8b:The statement is false. An investor gains bonus
shares at zero cost, However, the market price of the stock will
come down & over the long period, the investor definitely
maximizes his wealth due to bonus shares.From company angle, bonus
issue is only an accounting entry & it doesnt change the
wealth/value of the firm.Recently, Bharti Airtel have issued bonus
share 2:1, due to which, the investors have gained Bonus shares at
zero cost & the market have come down to the extent of bonus
issue & immediately went up & investors have cashed the
bonus shares thus maximized their wealth. However, currently it is
trading down due to varied reasons.
