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sir,
i have saw some past year question ask about the dividend capacity of the company to paid off, and covenant gearing after demerger or covenant comply.may i ask any answer flow or concept for these question ? for example to answer wacc, we need to find ke kd, value equity , value of debt, and tax, so gather these information to give answer of wacc. like npv, we need find cash flow and discount it wacc. apv, ungear ke and benefit of finance cost.
but for dividend capacity and gearing ratio or covenant gearing by bank. i am not good in these, because my study didnt cover it so specific and detail and seem like it is not important topic for our study, but it come out frequently in the exam.
i know it is simply use using knowledge of fm and afm to answer, but it quite hard for me to answer it, if do not understand the concept behind. currently i not so understand what is dividend capacity , i find few question ask about what is dividend capacity, or how much dividend company can pay. and i know gearing ratio and covenant imposed by bank meaning, but when asking me whether it is break the covenant, i got a bit blur, because not so much knowledge on this
can sir guide me how to deal with these question ? i mean when facing this question, i need find what value first
Questions on dividend capacity etc. are really testing financial accounting knowledge. In the professional exams the examiners are entitled to ask on any topics for all earlier exams. For AFM the only topics from other exams that are asked are financial accounting topics (for example, quite often a question will ask for a forecast SOPL and/or a forecast SOFP).
It is not possible for me to give a standard approach to this sort of question. Keep practicing all the questions in your Revision Kit (and ask here about anything that is not clear) and obviously if you are not clear about what any of the terms mean (such as dividend capacity) then again ask here and I will explain.
dividend capacity is the ability of company to pay amount of dividend back to shareholder, am i correct ?
but if ask what is dividend capacity, it is hard for me to determine the value, because if retain in full cash flow, which make shareholder unhappy, but if fully pay back to shareholder, which make no reinvestment of cash flow, make not good for company also didnt maximization shareholder wealthok sir, i will try the question
by the way, recently i had search someone ask question regarding dividend capacity before, and is that can be answer the dividend capacity by calculate free cash flow to equity ?in addition, refer to june 2015 question 3 (C)
as my understanding, free cash flow to equity is mean free cash flow to shareholder, also mean the cash which shareholder can get.(correct me if wrong)
i done some free cash flow to equity, since there have no mention in the question about how many cash inflow the company will retain, so we usually will assume fully pay back to shareholder when the money earn in that year, so also mean that, free cash flow to equity are do not have reinvestment assumption if we doing the fcf to equity (pv of future cash flow or perpetuity )
because when i saw the answer to calculate the value of firm, they are take the dividend pay
back rather than dividend plus retained earning.
it make me confuse againDividend capacity is the amount available for shareholders (the free cash flow to equity). It is the most they can pay as dividend, but that does not mean that it is all paid as dividend – most companies will not pay it all out as dividend but will retain some of it.
It is the expected future dividends to be paid that determines the market value of equity. If the company is retaining then the dividend paid will be lower but there will be expected growth in dividends and so we use the growth model to calculate the MV.
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