[mng3693]

Got 81 for F9 🙂

[mng3693]

Got 81%

[mng3693]

The only explanation I could come up with is, that the company’s dividend policy has a signalling effect on the market value of the share price.

If the dividend policy is such that, the company does not pay out dividend for a long period of time and simultaneously doesn’t report any noteworthy growth in profitability, this would cause the share prices to fall.

And as same as valuing any security, we find out the PV of future income streams discounted by the investors required rate of return. In a convertible bond, the expect future cash flows are the coupon payments + higher of conversion option or capital repayment, if share prices has fallen by the time of maturity, the so does the value of the conversion option.

Because the share price changes, the cash flow on maturity will change as well, therefore changing the PV of the bond and thus the Valuation.

Hope this helped. 🙂

[mng3693]

Please forward the F9 mock exam of June 2014 to mario.ganeshathasan@gmail.com

Thanks

[mng3693]

I have a question regarding the June 2010 Q.4 part B

In that question, the second part asks us to calculate the price of the share taking in to account the change in dividend policy.

The answer has taken D1 as the year 4 dividend
But according to my understanding D1 = 70(1.03) = 72.1

Could you PLEASE explain how and why the answer has taken the year 4 as D1 without considering the dividend growth?

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