Introduction to Financial Management - Essay Example

Financial management Task Question one Return = dividend/Po, where Po is the price of the share. Therefore, using the information on stock A, the return = (4.5/35) = 12.86 %. On the other hand, the return of stock B = (4.25/36) = 11.81%. Thus, if the investor requires a return of 12%, he should choose stock A since the return is 12.86% (Titman, Keown & Martin, n.d., pp. 3-13). Question two There are two circumstances under which the dividend might fall, that is, a constant growing dividend and non-constant growing dividend.

Assuming a dividend of 16p, two years and 10% growth, for dividend with a constant growth, the following formula is used in the valuation process. Do 16 (1 + g) ^2 where Do is the opening amount of dividend, g is the growth rate and “2” is the period. For this type of growth, to determine the growth level at time t, the value can be determined once by introducing a power, which is t as follows Dt = 16 (1 + g) ^t (Titman, Keown & Martin, n.d., pp. 3-13). Question three The time t for the dividend growth is one year, therefore, the t = 1.

Market capitalization rate indicates the rate of return on investment. Therefore, the price of the stock = 24 (1 +0.09) ^1/(1 + 0.15) ^1 = 22.75 pence (Titman, Keown & Martin, n.d., pp. 3-13). Question four The return on equity = Net income/equity. Mannington’s ROE = 20%. Let net income be x. Therefore, 20% = x/(200,000,000 * 50) = x/10,000,000,000. X = (20% * 10,000,000,000) = 2,000,000,000. Mannington company declared 60% of the profits (net profit) as dividends. On that note, the total dividend to be paid = (60% * 2,000,000,000) = 1,200,000,000.

The company’s dividend per share = (1,200,000,000/200,000,000) = 6pence per share. Given the company’s expected rate of return, at this point it is possible to obtain the value of the shares using the formula Vs = D/rs where Vs is share value, D is the dividend and rs is the expected return. Therefore, Vs = (6/0.13) = 46.15pence (Titman, Keown & Martin, n.d., pp. 3-13). Question five Using the formula for constant dividend growth, RCs = D/Vcs + g where rcs is the return, D is the dividend, Vcs is the share price and g is the growth.

Therefore, return = (20/2.35) + 0.06 = 8.571% (Titman, Keown & Martin, n.d., pp. 3-13). Question six The director’s view that the retained earnings would be cheaper than the preference share is valid. To justify the validity, the only cost that accompanies the use of retained earnings is the failure to pay dividends to the shareholders. Thus retained earnings have no flotation cost, they are tax free and does not lead to loss of control of a company. Preference shares on the other hand, have a fixed charge in the form of dividend, paid to the shareholders.

Secondly, in case the dividends are not paid for a long period, the shareholders could gain control of the firm. Therefore, the preference shares carry weightier financial and non-financial costs as compared to retained earnings (Titman, Keown & Martin, n.d., pp. 3-13) List of ReferencesTitman, Keown & Martin, n.d., ‘Share capital: stock valuation’ Retrieved from lecture notes. PPT.