Answer Happy

Question 3 Penrith Lakes plc has the following market value balance sheet: Assets Liabilities and Equity Cash £4,000 Debt £5,000 Fixed Assets £21,000 Equity £20,000 The stock currently sells for £10 per share and there are 2000 shares outstanding. The firm will either pay a dividend of £2 per share or repurchase £4000 worth of stock. Required: (a) Calculate the price per share if dividends are paid. Ignore taxes. (8 marks) (ii) Calculate the price per share if Penrith Lakes plc repurchases stock. Ignore taxes. (8 marks) (b) The firm has earnings of £4,000 per year. (i) Calculate the earnings per share under each alternative (4 marks) (ii) Calculate the price-earnings ratio of each alternative. (4 marks) (c) Explain the Modigliani and Miller view of dividend policy including the model's assumptions and the effect on these of imperfect capital markets and taxation. (26 marks) (Total 50 marks)