FIN 571 Corporate Finance Week 1 - Long-Term Financing - Solved Assignments | Finance

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FIN 571 Corporate FinanceWeek 1-Long-Term FinancingThis course applies corporate finance concepts to make management decisions. Students learnmethods to evaluate financial alternatives and create financial plans. Other topics include cashflows, business valuation, working capital, capital budgets, and long-term financing. Thisgraduate-level courseis 6 weeks.Week 1-Long-Term FinancingQ1-Evaluate the effect of dividend policy on stock price.Answer–Dividend is that part of net profit which is paid in cash by the company to itsshareholders after exclusion of the retained profit. Dividend may also be defined as divisibleprofits which are distributed amongst the members of a company in proportion to their shares ina manner as is prescribed by law. Dividend policy can be defined as the plan of action adoptedby the company’s board of directors whenever the dividend decision is to be made. Dividendpolicy determines what percentage of earnings the company shouldbe paidout to shareholdersand what portion will be retained in the business to finance long-term growth.The main objective of financial management is to maximize the wealth of the shareholders.Therefore, while taking dividend decision, the management should keep in view the effect of thisdecision on the wealth of the shareholders. If the payment of dividend is helpful in achieving thisobjectives, it should be paid otherwise the profits should be retained in the business for financinginvestment programmes. Thus, dividend decision is based on the fact that how far it is effectivein increasing the wealth ofthe shareholders i.e. value of the firm or shares. Financial expert havenot been unanimous on this issue. Still various models have been involved to evaluate the

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dividend policy decisions in relation to value of the firm. One school of thought associated withWalter,Gorden etc. holds that the dividend payment affects the market value of the shares and asa result the dividend policy is relevant for the overall value of the company. On the other hand,the other thought associated with Modigliani and Miller holds that dividend decision is irrelevantand it does not affect the market value of the shares as investors are basically indifferent toreturns in the form of dividends or capital gains.Q2-Explain the types and main features of long-term debt.Answer–“Debenture includes bonds, debenture stock, or any other securities of a companywhether constituting a charge on the assets of the company or not.” In fact debenture is anacknowledgement of debt by a company. It is an instrument in writing under which a companyagrees to pay a fixed rate of interest at a periodical interval and repay the loan at expiry of thestipulated time.Features of debentures1.Written Acknowledgement of debt–A debenture is a written acknowledgement of debttaken by a company. It contains the name of debenture holder and the number ofdebenture held by him.2.Refund of debt–It is obligatory to repay the amount of the debenture by the company atcertain specified date. If the debt is not repaid at the specified date, the debenture holdermay take recourse to law for the same.3.Claims on Income–The fixed rate of interest is payable on debenture at fixed dates i.e.half yearly or yearly irrespective of its level of earnings. Even if a company makes noprofit or incurs loss, it is under an obligation to pay interest to its debenture holders.

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