Part A: Dividend Policy

Morning Star conducted a search to reveal the top dividend-paying stocks on the FTSE 350. The data was collected in October 2012 and the list of 20 large- and mid-cap companies with dividend yield figures (ranging from 5.9% to just over 14% for the 12 months period) are available at morningstar.co.uk/uk/news/95410/top-20-high-yielding-stocks.aspx

Required:

Critically appraise how companies set their dividend policies, and explain the factors that a company will consider in setting its dividend policy and in determining the level of dividend to be paid. Support your arguments by reference to ONE of the top 20 companies listed in the webpage of Morning Star mentioned above.

Part B: Working Capital Policy

Required:

Critically appraise how companies set their working capital policies, and explain the factors that a company should consider in setting its working capital policy and in determining the level of working capital to be maintained.

Support your arguments by reference to TWO FTSE250 companies in the same industry.

The explanation should emphasise the trade-off relationship between liquidity and profitability with reference to conservative, moderate and aggressive working capital policies. Your comments should incorporate both theoretical/academic arguments and real world practices. You should research the subject beyond the basic facts, and must provide calculations, references and critical commentary to
support the points. You should also provide a brief introduction on the key issues and a conclusion consistent to your discussion.

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/indices/constituents-indices.html?index=MCX

Part C: Cost of Capital/ Investment Appraisal

You have been appointed as the financial manager for Decido PLC and have been tasked with computing their weighted average cost of capital

Based on preliminary information available from the financial statements, you have been able to extract the following

Decido will have to settle the 8% convertible debt at par in 8 year time

Required:

a) Compute the market value weighted average cost of capital of Decido stating and justifying any assumptions made.

b) Discuss the circumstances under which the WACC is ideal for use in an Investment appraisal. This discussion should explain;

- Business and financial risk

- Their impact on WACC

- An explanation of how some types of risk require an adjustment to WACC and how these adjustments are done

c) Discuss whether the dividend growth model or the Capital Asset Pricing Model offers a better estimate of a company's cost of capital. An in-depth analysis, evaluating the pros and cons of both methods, is expected.