Financial management revision question & answer

CPA-Financial-Management-Section-3 Revision kit

The most recent financial data for the Rare Watts disclose the following: Dividend per share Sh.3.00
Expected annual dividend growth rate 6 percent Current required rate of return 15 percent

The company is considering a variety of proposals in order to redirect the firm‟s activities. The following four alternatives have been suggested:
1. Do nothing in which case the key financial variables will remain unchanged.
2. Invest in venture that will increase the dividend growth rate to 7% and lower the required rate of return to 14%.
3. Eliminate an unprofitable product line. The action will increase the dividend growth rate to 8% and raise the required rate of return to 17%.
4. Acquire a subsidiary operation from another company. This action will increase the dividend growth rate to 9% and required rate of return to 18%.

Required:
For each of the proposed actions, determine the resulting impact price and recommend the best alternative.
ANSWER

The best alternative is to invest in a venture since this option has the highest impact price of Sh.45.86.

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