Posted: September 13th, 2017

Advanced Financial Management

Paper, Order, or Assignment Requirements

Question 
NewStar Airways Plc. is a company which pays dividends. There are 50 million shares in issue. The company’s Cost of Equity is 14%. In the last 3 years it has had the following Earnings Attributable to Ordinary Shareholders.

Year Earnings Dividend Paid

2011 £ 56,000,000 £ 19,600,000
2012 £ 75,500,000 £ 26,425,000
2013 £ 66,000,000 £ 23,100,000

The most recent dividend which the company paid was in 2013 and this time constitutes D0 for the company. 

Required

a) Calculate NewStar Airways’ Earnings Per Share and also the Dividend Per Share for each of the last 3 years.
(6 marks)

b) What can be identified as NewStar Airways dividend payment Policy?
(2 marks)

c) Calculate the average annual growth rate of dividends between 2011 and 2013.
(2 marks)

d)
i) Using the Dividend Discount Model, calculate the expected share price for NewStar Airways at time 0. i.e. Immediately after the 2013 dividend had been paid.
(5 marks)

ii) If the share price was £8.54, at that time what should a rational investor have done, and why?
(2 marks) 
e) Critically evaluate the calculations which you have just made in respect of NewStar Airways.
(8 marks)