Question

1) Describe two signals, one pro, one con, a company may send to the markets when they initiate a regular dividend.

2) List one advantage and one disadvantage of using leverage in the corporate capital structure.

3)Pemaprint PLC is considering a production line. The new equipment for the line will cost $1,565,000. In addition, net working capital will increase by $115,000 and remain at the level for the life of the project. The new line is expected to generate cash flow for the next four years of $365,000, $480,000, $590,000 and $760,000. Pemaprint's discount rate for the project is 10.79%. The net present value of the project is closed to:

a) $66,342
b) $93,812
C) $55,142

Answer 1

1	Dividend	Pros	It will help investor to gain some return during the period of holding such investment.
		Cons	It create an impact among investors that the company is a low growth company,since most of the growth companies don't pay any dividend and re invest the same to increase shareholders wealth.
2	Leverage	Pros	It is an ideal source of finance for merger and aqusitions, as the same is required for a brief period.
		Cons	It will be more costly then any other finance source,as to attract investor a company shall have to pay a high amount of interest to leverage finance.
						=1/(1+10.79)^N no of years
3	NPV		Yr.	Cash Inflow	Cash Outflow	[email protected]%	PV of Cash Inflow	PV of Cash Outflow
			0	0	1565000	1	0	1565000
			1	365000	115000	0.9026	329452.12	103799.98
			2	480000	0	0.8147	391057.04	0.00
			3	590000	0	0.7354	433860.71	0.00
			4	760000	0	0.6637	504442.12	0.00
			4	115000	0	0.6637	76330.06	0.00
			Total				1735142.05	1668799.98
					NPV	PV of cash inlfow-PV of cash outflow
						66342.07 i.e. A