Newly established, unincorporated service entity → focuses on growth, service quality and staying liquid; dividends and optimal capital structure are not primary yet.

Answer: B, C, D

Practical considerations for dividend/retention policy of a high-risk exploration company facing volatile profits and major investment needs:

A. Timing and size of cash flows needed for the new investment – crucial for deciding how much to retain vs. pay out – Relevant.

B. Fluctuating projected profits – affects ability to sustain dividends – Relevant.

C. Legislation and regulation on distributable profits – always a hard constraint on dividends – Relevant.

D. Dividend policies of mature multinationals – not a practical constraint for a small, high-risk explorer – Not key.

E. Interest rates and tax savings on debt – less relevant where debt finance is unlikely to be available – Not key.

Answer (200289):

Because taking on more debt risks breaching a debt covenant, the company should avoid additional borrowings (bonds or overdraft). A rights issue raises new equity from existing shareholders, improving gearing rather than worsening it, and is therefore the most appropriate source of the $800m expansion finance.

The value of a call option increases when:

The underlying share price increases

The strike price decreases

The time to expiry increases

Volatility increases

Risk-free rate increases

Looking at the options:

A. Increase in strike price → reduces call value

B. Decrease in volatility → reduces call value

C. Increase in time to expiry → increases call value ✅

D. Decrease in share price → reduces call value

Answer: C. An increase in the time to expiry.

PBIT = $1.1m

Debt = $2m at 5% → interest = $0.1m

Profit before tax = 1.1 – 0.1 = $1.0m

Tax at 20% = 0.2m → Earnings after tax = $0.8m

Earnings yield = Earnings ÷ Market value of equity = 10%:

0.8=0.10×MV⇒MV=0.80.10=$8m0.8 = 0.10 \times \text{MV} \Rightarrow \text{MV} = \frac{0.8}{0.10} = \$8\text{m}0.8=0.10×MV⇒MV=0.100.8​=$8m

Shares in issue = 4m → share price:

Price=84=$2.00\text{Price} = \frac{8}{4} = \$2.00Price=48​=$2.00

Answer: C: $2.00

Profit after tax in Country Z = ZS20m (tax rate in Z = 30%).

Let pre-tax profit = PPP.

0.7P=20⇒P=200.7≈28.57m ZS0.7P = 20 \Rightarrow P = \frac{20}{0.7} \approx 28.57\text{m ZS}0.7P=20⇒P=0.720​≈28.57m ZS

Country Y’s tax rate = 60%, with full double tax relief.

Total tax on P should be 0.6P0.6P0.6P, so after all tax:

Net profit=0.4P=0.4×28.57≈11.43m ZS\text{Net profit} = 0.4P = 0.4 \times 28.57 \approx 11.43\text{m ZS}Net profit=0.4P=0.4×28.57≈11.43m ZS

Exchange rate: YS1 = ZS5 → 1 ZS = 0.2 YS.

Net profit in YS=11.435≈2.29m YS\text{Net profit in YS} = \frac{11.43}{5} \approx 2.29\text{m YS}Net profit in YS=511.43​≈2.29m YS

Answer: A. YS2.29 million