Assignment No.

Ambreen Akram(01-221202-027)

Question No. 1: How would a change in investment opportunities affect dividend under the
residual policy? Explain with the help of an example.

The residual world implies leftover and residual policy means distributions that are paid from
leftover earnings.

Distribution=Net income-[(target ratio)* (total capital structure)

]

Suppose a company has 60 million of net income and their capital structure is 40% debt and 60%
equity. If company has poor opportunity of investment then their capital budget would be 40
million

Distribution=60- [60%*40]=36 million

If company investment opportunity is average then capital budget would increase to 70 million
then retained earning would be 42 million and

Distribution=60-42=18 million

If the capital budget are good then capital budget would increase into 150 million so required
equity is 90million then company would retain all the net income

Distribution=60-90=-30million

Question No. 2: Enlist and explain the reasons for stock repurchases and stock splits.

• To make it more accessible to a larger number of investors

• First, a split is usually undertaken when the stock price is quite high, making it expensive
for investors to good share
• the higher number of shares outstanding can result in greater liquidity for the stock,
which facilitates trading. Increasing the liquidity of a stock makes trading in the stock
easier for buyers and sellers.
• Right before the split, each share was trading at around $540. After the split, the price per
share at the market open was $135 (approximately $540 ÷ 4). Existing shareholders were
also given four additional shares for each share owned, so an investor who owned 1,000
shares of AAPL pre-split would have 5,000 shares post-split. Apple's outstanding shares
 increased from 3.4 to approximately 13.6 billion shares, however, the market cap
remained largely unchanged at $2 trillion.

Question No. 3: What are the advantages and disadvantages of stock repurchases? Explain
using different examples.

Repurchasing outstanding shares can help a business such as

• reduce its cost of capital,

• benefit from temporary undervaluation of the stock,
• consolidate ownership,
• inflate important financial metrics
• free up profits to pay executive bonuses.
• Replacing equity financing for more cost-effective debt financing
• To profit off of undervalued shares or consolidate equity ownership

These distributions to shareholders, which generally come on top of dividends, disrupt the
growth dynamic that links the productivity and pay of the labor force. The results are increased
income inequity, employment instability, and anemic productivity. Buybacks' drain on corporate
treasuries has been massive.