Introduction to Financial Management Essay Example | Topics and Well Written Essays - 500 words - 1

Introduction to Financial Management - Essay Example Do 16 (1 + g) ^2 where Do is the opening amount of dividend, g is the growth rate and â€Å"2† is the period. For this type of growth, to determine the growth level at time t, the value can be determined once by introducing a power, which is t as follows Dt = 16 (1 + g) ^t (Titman, Keown & Martin, n.d., pp. 3-13). The time t for the dividend growth is one year, therefore, the t = 1. Market capitalization rate indicates the rate of return on investment. Therefore, the price of the stock = 24 (1 +0.09) ^1/(1 + 0.15) ^1 = 22.75 pence (Titman, Keown & Martin, n.d., pp. 3-13). The return on equity = Net income/equity. Mannington’s ROE = 20%. Let net income be x. Therefore, 20% = x/(200,000,000 * 50) = x/10,000,000,000. X = (20% * 10,000,000,000) = 2,000,000,000. Mannington company declared 60% of the profits (net profit) as dividends. On that note, the total dividend to be paid = (60% * 2,000,000,000) = 1,200,000,000. The company’s dividend per share = (1,200,000,000/200,000,000) = 6pence per share. Given the company’s expected rate of return, at this point it is possible to obtain the value of the shares using the formula Vs = D/rs where Vs is share value, D is the dividend and rs is the expected return. Therefore, Vs = (6/0.13) = 46.15pence (Titman, Keown & Martin, n.d., pp. 3-13). Using the formula for constant dividend growth, RCs = D/Vcs + g where rcs is the return, D is the dividend, Vcs is the share price and g is the growth. Therefore, return = (20/2.35) + 0.06 = 8.571% (Titman, Keown & Martin, n.d., pp. 3-13). The director’s view that the retained earnings would be cheaper than the preference share is valid. To justify the validity, the only cost that accompanies the use of retained earnings is the failure to pay dividends to the shareholders. Thus retained earnings have no flotation cost, they are tax free and does not lead to loss of control of a company. Preference shares on the