FIN 571 Corporate Finance Week 1 - Long-Term Financing
A solved assignment on corporate finance and long-term financing strategies.
Layla Cooper
Contributor
4.8
48
about 1 month ago
Preview (3 of 7)
Sign in to access the full document!
FIN 571 Corporate Finance Week 1 - Long-Term Financing
This course applies corporate finance concepts to make management decisions. Students learn
methods to evaluate financial alternatives and create financial plans. Other topics include cash
flows, business valuation, working capital, capital budgets, and long-term financing. This
graduate-level course is 6 weeks.
Week 1 - Long-Term Financing
Q1 - 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 its
shareholders after exclusion of the retained profit. Dividend may also be defined as divisible
profits which are distributed amongst the members of a company in proportion to their shares in
a manner as is prescribed by law. Dividend policy can be defined as the plan of action adopted
by the company’s board of directors whenever the dividend decision is to be made. Dividend
policy determines what percentage of earnings the company should be paid out to shareholders
and 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 this
decision on the wealth of the shareholders. If the payment of dividend is helpful in achieving this
objectives, it should be paid otherwise the profits should be retained in the business for financing
investment programmes. Thus, dividend decision is based on the fact that how far it is effective
in increasing the wealth of the shareholders i.e. value of the firm or shares. Financial expert have
not been unanimous on this issue. Still various models have been involved to evaluate the
This course applies corporate finance concepts to make management decisions. Students learn
methods to evaluate financial alternatives and create financial plans. Other topics include cash
flows, business valuation, working capital, capital budgets, and long-term financing. This
graduate-level course is 6 weeks.
Week 1 - Long-Term Financing
Q1 - 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 its
shareholders after exclusion of the retained profit. Dividend may also be defined as divisible
profits which are distributed amongst the members of a company in proportion to their shares in
a manner as is prescribed by law. Dividend policy can be defined as the plan of action adopted
by the company’s board of directors whenever the dividend decision is to be made. Dividend
policy determines what percentage of earnings the company should be paid out to shareholders
and 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 this
decision on the wealth of the shareholders. If the payment of dividend is helpful in achieving this
objectives, it should be paid otherwise the profits should be retained in the business for financing
investment programmes. Thus, dividend decision is based on the fact that how far it is effective
in increasing the wealth of the shareholders i.e. value of the firm or shares. Financial expert have
not been unanimous on this issue. Still various models have been involved to evaluate the
dividend policy decisions in relation to value of the firm. One school of thought associated with
Walter,Gorden etc. holds that the dividend payment affects the market value of the shares and as
a 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 irrelevant
and it does not affect the market value of the shares as investors are basically indifferent to
returns 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 company
whether constituting a charge on the assets of the company or not.” In fact debenture is an
acknowledgement of debt by a company. It is an instrument in writing under which a company
agrees to pay a fixed rate of interest at a periodical interval and repay the loan at expiry of the
stipulated time.
Features of debentures
1. Written Acknowledgement of debt – A debenture is a written acknowledgement of debt
taken by a company. It contains the name of debenture holder and the number of
debenture held by him.
2. Refund of debt – It is obligatory to repay the amount of the debenture by the company at
certain specified date. If the debt is not repaid at the specified date, the debenture holder
may 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 no
profit or incurs loss, it is under an obligation to pay interest to its debenture holders.
Walter,Gorden etc. holds that the dividend payment affects the market value of the shares and as
a 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 irrelevant
and it does not affect the market value of the shares as investors are basically indifferent to
returns 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 company
whether constituting a charge on the assets of the company or not.” In fact debenture is an
acknowledgement of debt by a company. It is an instrument in writing under which a company
agrees to pay a fixed rate of interest at a periodical interval and repay the loan at expiry of the
stipulated time.
Features of debentures
1. Written Acknowledgement of debt – A debenture is a written acknowledgement of debt
taken by a company. It contains the name of debenture holder and the number of
debenture held by him.
2. Refund of debt – It is obligatory to repay the amount of the debenture by the company at
certain specified date. If the debt is not repaid at the specified date, the debenture holder
may 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 no
profit or incurs loss, it is under an obligation to pay interest to its debenture holders.
Preview Mode
Sign in to access the full document!
100%
Study Now!
XY-Copilot AI
Unlimited Access
Secure Payment
Instant Access
24/7 Support
Document Chat
Document Details
University
University of Phoenix
Subject
Finance