A shareholder of QSX Co is concerned about the recent performance of the company and has collected the following fi nancial information.
One of the items discussed at a recent board meeting of QSX Co was the dividend payment for 2010. The fi nance director proposed that, in order to conserve cash within the company, no dividend would be paid in 2010, 2011 and 2012. It was expected that improved economic conditions at the end of this three-year period would make it possible to pay a dividend of 70c per share in 2013. The fi nance director expects that an annual dividend increase of 3% per year in subsequent years could be maintained.
The current cost of equity of QSX Co is 10% per year.
Assume that dividends are paid at the end of each year.
Required:
(a) Calculate the dividend yield, capital gain and total shareholder return for 2008 and 2009, and briefl y discuss your fi ndings with respect to:
(i) the returns predicted by the capital asset pricing model (CAPM);
(ii) the other fi nancial information provided. (10 marks)
(b) Calculate and comment on the share price of QSX Co 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. (7 marks)
(c) Discuss the relationship between investment decisions, dividend decisions and fi nancing decisions in the context of fi nancial management, illustrating your discussion with examples where appropriate. (8 marks)