Deloraine Ltd (Deloraine) is a small listed public company. Its shares are currently trading at $8 per share. Deloraine is considering different dividend policies for the future including cash dividend and share dividend policies.

Deloraine’s shareholders’ equity is as follows:

Preference shares (10,000 shares) $100,000

Ordinary shares (200,000 shares) $600,000

Retained Earnings


Total shareholders’ equity:   $1,050,000

a Briefly discuss the advantages and disadvantages of the following dividend policies from the firm’s point of view:

i Payment of a fixed cash dividend payout

ii Payment of a cash dividend at a constant pay-out ratio equal to 40% of positive earnings

iii Payment of a share dividend

b Show the effect that the payment of a $0.80 cash dividend to ordinary shareholders would have on Deloraine’s shareholders’ equity. [marks]

c Show the effect that the payment of 10% share dividend to ordinary shareholders would have on Deloraine’s shareholders’ equity.

d Show the effect that the 5-for-2 share split would have on Deloraine’s shareholders’ equity.

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QUESTION 2Quest Exploration Led is trying to take advantage of the commodity boom by increasing itsexploration activities. However, as a junior mining company it will need to raise additionalcapital over the coming year. The tax rate of the company is 30%. As financial manager, youhave prepared the following information and financial data.Debt: Quest Exploration can raise an unlimited amount of debt by selling $1,000 par (face)value, 6.5% coupon interest 10-year bonds. In order to sell the issue, an average discount of$20 per bond needs to be given.Preference shares: An unlimited number of preference shares can be sold under the followingterms: the shares have a face value of $100 per share, the annual dividend rate is 6% of theface value. The preference shares are expected to sell for $102.Ordinary shares: The current price of Quest Exploration’s ordinary shares is $35 per share. Acash dividend of $3.00 per share was recently paid. The firm’s dividends have grown at anannual rate of 5% and are expected to grow at this rate in the foreseeable future.The company is expected to raise 10 million to finance the expansion in which it will sell 4,000bonds, 1 million from preference shares and the remaining from ordinary shares.a Calculate the specific cost of each source of financing. (Round your answer to the nearest0.01%)b Calculate the weighted average cost of capital in the Quest Exploration new project