Question 9.8
A shareholder of Riang Berhad is concerned about the recent performance of the company and
has collected the following financial information.
Year to 31 May
Earnings per share
Dividend per share
Closing ex dividend share price
2009
58.9 cents
40-Ocents
RM6-48
2008
64.2 cents
38-5cents
RM8-35
2007
61.7 cents
37-0cents
RM7-40
One of the items discussed at a recent board meeting of Riang Berhad was the dividend payment
for 2010. The finance director proposed that, no dividend would be paid in 2010, 2011 and 2012
to conserve cash within the company. It was expected that improved economic conditions at the
end of this three-year period would make it possible to pay a dividend of RM0.70 per share in
2013. The finance director expects that an annual dividend increase of 3% per year in subsequent
years could be maintained.
The current cost of equity of Riang Berhad is 10% per year. Assume that dividends are paid at
the end of each year.
Required:
a) Comment on the company's decision to retain cash for the next three years and its
possible effects to the shareholders. (6 marks)
b) Calculate and comment on the share price of Riang Berhad using the dividend growth
model in the following circumstances:
(i) based on the historical information provided;
(ii) if the proposed change in dividend policy is implemented. (10 marks)
c) Discuss the relationship between investment decisions, dividend decisions and financing
decisions in the context of financial management, illustrating your discussion with
examples where appropriate. (Note: Consider relevant theories in your discussion)
(9 marks)
[Total: 25 marks]
