ABC Company has been profitable in FY 2015 and the Board is planning to declare dividends to its shareholders. They intend to declare a cash dividend of $2 million at the forthcoming annual general meeting. However, the Board is unsure whether this is an appropriate level of dividends to declare.

(a) Calculate the dividend pay-out ratio and the ex-dividend share price.

(b) Shareholders of a company are eligible to receive dividends when declared while bondholders are eligible to receive interest payments which is mandatory. Based on this, shares are considered as riskier compared to bonds and the required rate of return on shares is higher than that on bonds.

However, in reality, bondholders face more risk than shareholders. Examine how this could arise and how the impact can be reduced.

arnings after tax = 6,359