May 26, 2022

MAASAI MARA UNIVERSITY REGULAR UNIVERSITY EXAMINATIONS 2013/2014 ACADEMIC YEAR FOURTH YEAR SECOND SEMESTER SCHOOL OF BUSINESS AND ECONOMICS BACHELOR OF BUSINESS MANAGEMENT   COURSE CODE: BBM 435 COURSE TITLE: AGRIBUSINESS MARKETING SYSTEMS DATE: 28TH APRIL 2014 TIME: 9.00AM – 12.00PM INSTRUCTIONS TO CANDIDATES Answer question ONE and any other THREE questions This paper consists of 2 printed pages. Please turn over. 1. (a).Define Marketing concept (2mks) (b).Explain the following terms used in marketing with relevant examples i. Market segmentation (2mks) ii. Price skimming (2mks) iii. Product differentiation (2mks) iv. Market failure (2mks) v. Subsidies (2mks) (c). Assume a country imposes an import tariff on wheat entering the country. Use a graph to illustrate the effects of the tariff on the price of wheat in the country, wheat production, wheat consumption, and wheat imports. (10mks) (d). Discuss any 4Ps of Marketing (8mks). 2. (i) Explain strategies used by market leaders to protect their market share in the market (10mks) (ii) Explain the reasons for market intervention (10mks) 3. Explain the major of functions of marketing systems (20mks) 4. Discuss the causes of food insecurity and solutions (20mks) 3 (a).Explain a product life cycle with the aid of a graph. (10mks) (b).Differentiate between selling, standardization and market intelligence (6mks) (c) Explain the reasons for market failure. (4mks)

MAASAI MARA UNIVERSITY UNIVERSITY EXAMINATIONS 2013/2014 SECOND SEMISTER SUPPLEMENTARY EXAMINATION FOR THE DEGREE OF BACHELOR OF BUSINESS MANAGEMENT BBM 435: AGRIBUSINESS MARKETING SYSTEMS 1.(a).Explain the following terms used in marketing with relevant examples i. Market niche ii. Price penetration iii. Quota iv. Tariff v. Product brand vi. Price floor( each 2mks ) (b).what are the challenges faced in agribusiness market system?(10mks) (c).what is the role of marketing in agribusiness sytem(8mks) 2 (a) .Market efficiency is only one part of the problem where there is justification for intervention in the market. Explain 5 other reasons for interventions(10mks). (b)It has been argued that most African countries relatively low level of development compared to other parts of the world has affected the implementation of agricultural policies in these countries. Discuss five possible state of affairs that have been done s having contributed to the state of affairs.(10mks) 4.Cooperative societies have become of great benefit to farmers. Discuss the ways in which farmers benefit from such organization .(20mks).

MAASAI MARA UNIVERSITY REGULAR UNIVERSITY EXAMINATIONS 2016/2017 ACADEMIC YEAR FOURTH YEAR SECOND SEMESTER   SCHOOL OF BUSINESS AND ECONOMICS BACHELOR OF BUSINESS MANAGEMENT/BACHELOR OF EDUCATION COURSE CODE: BBM 417 COURSE TITLE: INTERNATIONAL ECONOMICS DATE: 15TH MAY 2017 TIME: 11:00 – 13:00HRS INSTRUCTIONS TO CANDIDATES Answer Question ONE and any other THREE questions This paper consists of THREE printed pages. Please turn over. QUESTION ONE a) Explain the significance of the study of International Economics (6marks) b) Discuss why most less developed countries experience unfavourable trade with the rest of the world (7marks) c) Explain the policies that were put in place during Mercantilism to ensure acquisition of specie (6marks) d) Discuss the traditional arguments for Protectionism (6marks) QUESTION TWO A) Explain the factors that led to the emergence of Free Trade (8marks) B) Given the following: NOTE: Numbers in the table denote labour required to produce ONE unit of the product. (i) Explain what country A and B should specialize in its production (4marks) (ii) Suppose the output of Coffee is reduced by 1 unit in country A and output of Tea in country B fall by 1 unit. How would this affect the world’s total output? (4marks) QUESTION TWO Explain the following theories of international trade: (i) Comparative Advantage by David Ricardo (5marks) (ii) Imitation Lags Theory of Trade (5marks) (iii) The Product cycle Theory (5marks) QUESTION THREE a) Discuss the role of taste in shaping production and international trade (8marks) b) The problem of developing counties in international trade is the nature of their exports. Discuss. (7marks) QUESTION FOUR a) Explain how exchange rate affect the flow of capital in the international market (8marks) b) Explain the beliefs and practices of the mercantilist doctrine (7marks) QUESTION FIVE a) Given the following: NOTE: Numbers in the table denote labour required to produce ONE unit of the product. Can the two counties engage in beneficial trade? Prove your answer. (7marks) b) Explain how adoption of a common currency will promote trade among the members of the East African Cooperation (8marks)

  MAASAI MARA UNIVERSITY REGULAR UNIVERSITY EXAMINATIONS 2013/2014 ACADEMIC YEAR FOURTH YEAR SECOND SEMESTER SCHOOL OF BUSINESS AND ECONOMICS BACHELOR OF BUSINESS MANAGEMENT COURSE CODE: BBM 415 COURSE TITLE: : INTERNATIONAL FINANCE   DATE:15TH APRIL 2014 TIME:2.00PM – 5.00PM INSTRUCTIONS TO CANDIDATES Question ONE is compulsory Answer any other TWO questions This paper consists of 3 printed pages. Please turn over. QUESTION ONE a) Why is it important to study International Finance? [5marks] b) Describe the following terms used in International Finance; i. Currency swap [3marks] ii. Forward market hedge [3marks] iii. Balance of Payment [3marks] iv. Hedge fund [3marks] c) What is a foreign financial intermediary? Give three examples [4marks] d) State and briefly describe the three types of foreign exchange exposure. [9marks] QUESTION TWO a) International Monetary Fund and World Bank were established by Bretton Woods for divergent purposes. State and explain the functions of each of these organizations. [14marks] b) Enumerate and briefly describe participants in foreign exchange market. [6marks] QUESTION THREE a) What are some of the factors that led to formation of Multinational Corporations? [10marks] b) Clarify on some of the problems facing Multinational Corporations . [10marks] QUESTION FOUR a) Explain the meaning and purposes of derivatives. [8marks] b) State and explain any four types of options. [8marks] c) What is interest rate parity? [4marks] QUESTION FIVE a) Discuss the role of financial management in an international setting with particular reference to; i. Currency exchange rates [3marks] ii. Sources of finance [2marks] iii. Investing in oversees countries [3marks] b) A Kenyan import-export merchant was contracted on 1st January 2014 to buy 1,500 tonnes of a certain product from a supplier in Uganda at a price of Ush. 118,200 per ton. Shipment was to be made direct to a customer in Tanzania to whom the merchant had sold the product at Tsh. 462,000 per ton. Of the total quantity, 500 tonnes were to be shipped during the month of January 2014 and the balance by the end of the month of February 2014. Payment to the suppliers was to be made immediately on shipment, whilst one month’s credit from the date of shipment was allowed to the Tanzanian customer. The merchant arranged with his bank to convert those transactions in Kenyan shilling (Ksh.) on the forward exchange market. The exchange rates at on 1st January 2014 were as given below; The exchange commission is Ksh. 10 per Ksh. 1,000 (maximum sh. 1,000,000) on each transaction. Required Calculate the profit that the merchant made during the transaction (to nearest Ksh.) [12marks]

MAASAI MARA UNIVERSITY SCHOOL OF BUSINESS AND ECONOMICS UNIVERSITY EXAMINATIONS SUPPLEMENTARY PAPER MAY 2014 BBM 415: INTERNATIONAL FINANCE INSTRUCTIONS Answer question one and any two others Time allowed 2 hours Question one a. Differentiate between World Bank and the World Bank Group (5 marks) b. State the five closely associated institutions to the World Bank group (5 marks) c. Explain the functions of African Development Bank (IDB) (5 Marks) d. What are the importances of economic integration to a country like Kenya? (5 marks) e. Highlight the disadvantages of free trade in international finance (5 marks) f. Give reasons for trade restrictions in international finance (5 marks) (Total marks 30) Question Two a. Explain five methods a country can employ in international trade restrictions (10 marks) b. Discuss the possible disadvantages of international trade restrictions to any developing country. (10 marks) Question Three a. Discuss the advantages of export processing zones (EPZ) in international finance (10 marks) b. Highlight the factors that have led to increase in international finance. (10 marks) Question Four In Kenya today, senior management in the public sector are being hired on three year contracts which are renewable. What are the benefits and pillars of this approach to hiring senior managers (20 marks) Question five What is a research proposal and why is it useful in conducting strategic management research? Give an outline of the key components of a proposal for a seminar (20 marks)  

  MAASAI MARA UNIVERSITY REGULAR UNIVERSITY EXAMINATIONS 2013/2014 ACADEMIC YEAR FOURTH YEAR SECOND SEMESTER SCHOOL OF BUSINESS AND ECONOMICS BACHELOR OF BUSINESS MANAGEMENT   COURSE CODE: BBM 403 COURSE TITLE: ADVANCED ACCOUNTING II DATE:15TH APRIL 2014 TIME: 2.00PM – 5.00PM INSTRUCTIONS TO CANDIDATES SECTION A is compulsory Answer any three questions in SECTION B This paper consists of 5 printed pages. Please turn over. QUESTION ONE 25 MARKS COMPULSORY Dreamland Ltd, which had experienced trading difficulties, decided to reorganize its finances. On 31 December 2013 a final trial balance extracted from books showed the following position: Approval of the court was obtained for the following scheme for reduction of capital: 1. The preference shares to be reduced to £0.75 per share. 2. The ordinary shares to be reduced to £0.125 per share. 3. One £0.125 ordinary share to be issued for each £1 of gross preference dividend arrears; the preference dividend had not been paid for three years. 4. The balance on share premium account to be utilized. 5. Plant and machinery to be written down to £75,000. 6. The retained profits and all intangible assets, to be written off. At the same time as the resolution to reduce capital was passed, another resolution was approved restoring the total authorized capital to £350,000, consisting of 150,000 6% cumulative preference shares of £0.75 each and the balance in ordinary shares of £0.125 each. As soon as the above resolutions had been passed, 500,000 ordinary shares were issued at par, for cash, payable in full upon application. You are required: a) To show the journal entries necessary to record the above transactions in the company’s books; and ( 18 Marks) b) To prepare a balance sheet of the company, after completion of the scheme. (7 Marks) QUESTION TWO Grider Company’s condensed income statement is presented below: Included in the amounts allocated to each segment on the above percentages are the following expenses which relate to general corporate activities: Operating Segment Hotels Grains Candy Totals Operating and administrative expense $24,000 $18,000 $6,000 $48,000 Depreciation expense 3,500 4,000 2,500 10,000 Required; (a) Prepare a schedule showing the amounts distributed to each segment. ( 10 Marks) (b) Based only on the above information, which segments must be reported and why? (5 Marks) QUESTION THREE Explain clearly each of the following as regards Social Accounting; a) Measurement of Social Progress ( 5 Marks) b) Social Auditing and basis of its measurement ( 5 Marks) c) Human Resource Accounting ( 5 Marks) QUESTION FOUR The following are the summary accounts of Overseas Ltd, in foreign currency (Limas): Statement of Financial Position as at 31 December 2009 Your UK Company, Sterling Ltd, had acquired overseas Ltd, on January 2009 by subscribing £45,000 share capital in cash when the exchange rate was 14 Limas to the £1. The long term loan had been raised locally on the same data. On that day, overseas Ltd had purchased the plant and equipment for 700,000 Limas. It is being depreciated by the straight line method over 10 years. Required: Prepare the balance sheet and profit and loss account of overseas Ltd, in columnar form, in £s sterling, using: a) The closing rate method, and (8 Marks) b) The temporal method, and (7 Marks) QUESTION FIVE a) Explain each of the Limitations of Historical Cost Accounting ( 5 Marks) The balance sheet for Cremore Ltd at 31 December is given below (£000):

Capital of a firm is a mix (or proportion) of a firm permanent long term financing representing by debt, preferred stock and common stock Given that is firm has a certain structure of assets, which offers net operating earnings of given size and quality, and given a certain structure of rates in the capital markets in there some specific degree financing leverage at which the market value of firm’s securities will higher (or the cost of capital will be lower) than at other degrees of leverage? This question has been the basis of extensive work on capital structure and has resulted in a number of theories which we shall now focus on. 5.2 Assumptions and Definitions In order to grasp the elements of the capital structure and the values of the firm or the cost capital properly we make the following assumptions. • Firms employ only two types of capital debt and equity • The total assets of the firm are given and the degree of leverage can be changed by selling debts to repurchase shares or selling shares to retire debt. • Investors have the same probability distribution of expected future operating earnings for a given firm. • The firm has policy of paying 100 per cent dividends. • The operating earnings of the firm are not expected to grow. • The business risk is assumed to be constant and independent of capital structure and financial risk. • The corporate and personal income taxes do not exist this assumption is relaxed later on. In our analysis of capital structure theories we shall use the following basic definitions: S= market value for ordinary shares D= market value of debt V= total market value of the firm (S+D) = XNOI = expected net operating income i.e. earning before interest an taxes (EBIT) INT= interest charges DKei ).,.( d = YNI = net income or shareholders earnings (EBIT-INT) when corporate taxes do not exist. The capitalization rates or costs associated with the different earnings stream and the value of different securities can be defined as follows: The equation and definition described above are valid under any the capital structure theories. The controversy is with behavior of the variables like o k , e k and V etc. 5.3 Capital Structure Theories 5.3.1 Net Income Approach ……………. Capital Structure Matters The essence of the net income (NI) approach is that the firm can increase its or lower the overall cost capital by increasing the debt in the capital structure the crucial assumptions of the approach are: • The use of debt does not change the risk perception of investors as result the equity capitalization rate and the debt capitalization rate , remain constant with changes in leverage. • The debt capitalization rate is less than the equity capitalization rate (i.e. < ) d k e k • The corporate income taxes do not exist. The first assumption implies that if and are constant increased use of debt by magnifying the shareholders earnings will result in higher value of the firm via higher values of equity consequently the overall or the weighted average cost of capital will decrease. The overall cost of capital is measured by equation It is obvious from equation (4) that with constant annual net operating income (NOI), the overall cost of capital would decrease as the value of the firm V increases. The overall cost of capital can also be measured by equation; In equation (6) as per the assumption of the NI approach, and are constant and is less than therefore will be equal to if the firm is fully equity financed. V increases as the overall cost of capital decreases or as D/V increases. Equation (6) also implies that the overall cost of capital will be equal to if the firm does not use any debt i.e. D/V = 0 and that will approach as D/V approach one. 5.3.2 The Net Operating Income Approach ………………. Capital Structure Does Not Matter According to the net operating income (NOI) approach the market value of the firm is not affected by the capital structure changes. The market value of the firm is found not by capitalized the net operating income at the overall or the weighted average cost of capital which is a constant. The value of the firm V is determined by equation (8). Where is the overall capitalization rate, which depends on the business risk of the firm. It is independent of financial mix. If NOI and are independent of capital structure changes, the critical assumptions of the NOI approach are: • The market capitalizes the value of the firm as a whole. Thus the split between debt and equity is not important. • The market uses an overall capitalization rate to capitalize the net operating income and depends on the business risk. If the business risk is assumed to remain unchanged is a constant. • The use of less costly debt funds increases the risk of shareholders. This causes the equity capitalization rate to increase. Thus the advantage of debt is offset exactly by the increase in the equity – capitalization rate . e k • The debt – capitalization rate is a constant. d k • The corporate income taxes do not exist. As stated above under NOI approach the total value of the firm is found out by out by dividing the net operating income by the overall cost of capital . The market value of equity, S, can be determined by subtracting the value of debt D, from total market value of the firm V, (i.e. S = V – D). The cost of equity will be the measured as follows: Where, INT is the interest charges. Alternative the cost of equity can be defined as follows. Equation (7) indicates that if and are constant would increase linearly with debt equity ratio D/S. 5.3.3 The Traditional View …………… The Existence of an Optimal Capital Structure The traditional view which is also known as an

BBM 403 ADVANCED ACCOUNTING II – SUPPLIMENTARY Q1. The Shires Property Construction Company Ltd found itself in financial difficulty. The following is a trial balance at 31st December 2009 extracted from the books of books of the company. The authorized share capital is 200,000 ordinary shares of £1 each and 100,000 5% cumulative preference shares of £1 each. During a meeting of shares and directors, it was decided to carry out a scheme of internal reconstruction. The following scheme has been agreed. Each ordinary share is to be redesignated as a share of 25p. The existing 70,000 preference shares are to be exchanged for a new issue of 35,000 8% cumulative preference shares of £1 each and 140,000 ordinary shares of 25p each. The ordinary shareholders are to accept a reduction in the nominal value of their shares from £1 to 25p, and subscribe for a new issue on the basis for 1 for 1 at a price of 30p per share. The debenture holders are to accept 20,000 ordinary shares of 25p each in lieu of the interest payable. The interest rates is to be increased to 9½ %. A further £9,000 of this 9½% debenture is to be issued and taken up by the existing holders at £90 per £100. £6,000 of directors loan is to be canceled. The balance is to be settled by issue of 10,000 ordinary shares of 25p each. Goodwill and the profit and loss account balance are to written off. The investment in shares is to sold at the current market price of £60,000. The bank overdraft is to be repaid. £46,000 is to be paid to trade creditors now and the balance at quarterly intervals. 10% of the debtors are to be written off. The remaining assets were professionally valued and should be included in the books and accounts as follows: Land £90,000 Building 80,000 Equipment 10,000 Stock and work in progress 50,000 It is expected, that due to changed conditions and new management, operating profits will be earned at the rate of £50,000 pa after depreciation but before interest and tax. Due to losses brought forward and capital allowances it is unlikely that any tax liability will arise until 2007. Show the necessary journal entries including cash, to effect the reconstruction scheme. ( 8 Marks) Prepare the balance the sheet of the company immediately after the reconstruction. ( 7Marks) Show how the anticipated operating profits will be divided amongst the interested parties before and after the reconstruction, and ( 8 Marks) Comment on the capital structure of the company subsequent to reconstruction. ( 2 Marks) Q2. The current cost balance sheet of a company contained the following figures. Required Calculate the current cost gearing proportion. ( 15 Marks) Q3. The following id the Branch Trial Balance of Arusha Limited at 31 December 1993 You are given the following additional information: – Closing stock at the branch amounted to – TSh. 90,000 – There were no items in transit at the end of the year – Exchange rate 1 January 1989 TSh. 10 to Ksh. 30 April 1990 Tsh. 8 to 1 Ksh. 30 September 1992 Tsh. 7.5 to 1 Ksh. 1 January 1993 Tsh. 6 to 1 Ksh. 31 December 1993 Tsh. 4 to 1 Ksh. Average 1993 Tsh. 5 to 1 Ksh. – Depreciation is provided for on plant at 10% p.a on cost at the year end. Required: i. Prepare the Branch Trading Profit and Loss Account for 1993 using – Historical rate assuming the branch current on head office books was shown at Ksh. 7,450. – Closing rate assuming the branch current account in the head office books was shown at Ksh. 10,567. ii. Comment on the nature of the profit on exchange ( 15 Marks)Q 4 State the functions of each of the following: a) KASNEB ( 5 Marks) b) Registration of Accountants Board (RAB) ( 5 Marks) c) ICPAK ( 5 Marks) Q 5 Explain the following: a) Arguments for Inflation Accounting ( 5 Marks) b) Objectives of Inflation Accounting ( 5 Marks) c) Limitations of Inflation Accounting ( 5 Marks)  

MAASAI MARA UNIVERSITY REGULAR UNIVERSITY EXAMINATIONS 2013/2014 ACADEMIC YEAR THIRD YEAR SECOND SEMESTER SCHOOL OF BUSINESS AND ECONOMICS BACHELOR OF BUSINESS MANAGEMENT   COURSE CODE: BBM 392 COURSE TITLE: WAREHOUSING MANAGEMENT DATE:23RD APRIL 2014 TIME: 9.00AM – 12.00PM INSTRUCTIONS TO CANDIDATES Question ONE is compulsory Answer any other THREE questions This paper consists of 2 printed pages. Please turn over. Question One a) Explain the characteristics of Ideal warehouses (8mks) b) Explain the main principles of materials handling (10mks) c) Explain the factors to consider in locating a warehouse. (7mks) Question Two a) Justify the need for a warehouse management system in warehouses. ( 10mks) b) Explain the methods of storing materials or goods at the warehouse. ( 5mks) Question Three a) Explain the advantages of Public warehouses over private warehouses. (10mks) b) Explain the main pests found in warehouses and indicate how each one of them may be controlled. (5mks) Question Four a) Explain the need for warehouses by businesses. (10mks) b) Explain the documents used in warehouses (5mks) Question Five a) Distinguish between centralized and decentralized warehousing systems and give the advantages of each. (10mks) b) Explain bonded warehouses and how they operate. (5mks).

MAASAI MARA UNIVERSITY REGULAR UNIVERSITY EXAMINATIONS 2014/2015 ACADEMIC YEAR THIRD YEAR SECOND SEMESTER SCHOOL OF BUSINESS AND ECONOMICS BACHELORS DEGREE IN HUMAN RESOURCE MANAGEMENT COURSE CODE: BBM 391   COURSE TITLE: CORPORATE LEADERSHIP AND MANAGEMENT DATE : TIME : INSTRUCTIONS TO CANDIDATES Answer questions ONE and any other THREE Questions. QUESTION ONE (25 MARKS) States Corporations in Kenya are managed through an Act of Parliament of 2012. The Act mandates the head of State to appoint the leadership team in any state owned corporation referred as the Board of Management. Based on this understanding advice the management of Kenya Creameries Corporation based on the following. a). The Composition of the Board and its function once adopted by the institution. (10 Marks) b). The role State corporations in the attainment of sustainable development goals in kenya (10 Marks) c). The relevant Committees in the Board and their Roles ( 5 Marks) QUESTION TWO (15 MARKS) Institutions Leadership all over the world is faced with severe constraints that have affected their overall performance. If you are invited to discuss on the challenges facing institutional leadership in Kenya, how will you advise the management of Kenya Rail Ways Corporation? QUESTION THREE (15 MARKS) Kenya ports Authority was formed with a sole objective of giving back to the society through resource management. As a specialist in management, explain the reasons for corporate leadership and Management and the possible benefits that will be expected in the case of Kenya Ports Authority. QUESTION FOUR (15 MARKS) Institutional Leadership is characterized by the ethical practices at the work place. Based on this describe the Unethical issues that must be avoided in order to realize a productive Leadership process in the management of Kengen Ltd in Kenya. QUESTION FIVE ( 15 MARKS) Corporate Leadership can be for both state and private owned institutions. What do you think is the difference in the Leadership of Safaricom Company Ltd and the National Cereal and Produce Board in Kenya.  

MAASAI MARA UNIVERSITY CULTURE AND MANAGEMENT SPECIAL EXAM ANSWER QUESTION 1 AND ANY OTHER TWO QUESTION 1 i) Define culture ( 2 marks) ii) Distinguish between substantive and emotional conflict ( 4 marks) iii) Explain how perceptions influence individual worker’s behavour in the work place ( 6 marks) iv) Explain five different types of teams ( 5 marks) v) Discuss the ingredients for an effective team ( 8 marks) vi) Explain the roles played by organizational culture ( 5 marks) QUESTION 2 i) As a manager, explain how you can use teams to promote the achievement of the firm’s objectives ( 9 marks) ii) Distinguish between organizational culture and organizational climate ( 6 marks) iii) Highlight the main features of organizational culture are as follows ( 5marks) QUESTION 3 i) How can mangers create and lead high performance teams? ( 7 marks) ii) Discuss the characteristics of organizational culture ( 8 marks) iii) Briefly explain five ways to deal with conflict at the work place ( 5 marks) QUESTION 4 i) By use of the management process, highlight the requisite management skill that a manager requires to be effective ( 12 marks) ii) How does organizational culture promote or inhibit the attainment of organizational goals? ( 8 marks) QUESTION 5 i) Discuss the elements of organizational culture ( 10 marks) ii) How can managers leverage on the organizational culture to promote change? ( 6 marks)  

Dividend policy of a firm determines what proportion of earnings is paid to holders by way of dividends and what proportion is ploughed back in the firm for investment purposes. If a firm’s capital budgeting decision is independent of its dividend policy, a higher dividend payment will entail a greater dependence on external financing. Thus the dividend policy has a bearing on the choice of financing. On the other hand, if a firm’s Capital budgeting decision is dependent on its dividend decision, a higher payment will shrink its capital budget and vice versa. In such a case, the dividend policy has a bearing on capital budgeting decision. Discussions on dividend policy and firm value assumes that the investment decision of a firm is independent of it dividend decision. However, there are some models which assume that investment and dividend decisions are related. Two such models are and the Walter model Gordon model. 4.2 Dividend Theories 4.2.1 Walter Model James Walter has proposed a model of share valuation which supports the view that the dividend policy of the firm has a bearing on share valuation. His model is based on the following assumptions: The firm is an all-equity financed entity. Further, it will rely only on retained earnings to finance its future investments. This means that the investment decision is dependent on the dividend decision. The rate of return on investments is constant. The firm has an infinite life When the rate of return is lesser than the cost of capital (r < k), the price per share increases as the dividend payout ratio increases Thus Walter model implies that: The optimal payout ratio for a growth firm (r > k) is nil. The optimal payout ratio for a normal firm (r = k) is irrelevant. The optimal payout ratio for a declining firm (r < k) is 100 percent Clearly these policy implications lead to very extreme courses of action which make limited sense in the real world. Despite this simplicity or naivete, the Walter model is a useful tool to show the effects of dividend policy under varying profitability assumptions. 4.2.2 Gordon Model Myron Gordon proposed a model of stock valuation using the dividend capitalization approach. His model is based on the following assumptions: Retained earnings represent the only source of financing for the firm. Thus, like the Walter model the Gordon model ties investment decision to dividend decision The rate of return on the firm’s investment is constant. The growth rate of the firm is the product of its retention ratio and its rate of return. This assumption follows the first two assumptions. The cost of capital for the firm remains constant and it is greater than the growth rate. The firm has a perpetual life. Tax does not exist. Valuation Formula Gordon’s valuation formula is: Implications When the rate of return is greater than the discount rate (r > k), the price per share increases as the dividend payout ratio decreases When the rate of return is equal to the discount rate (r = k), the price per share remains unchanged in response to variations in the dividend payout ratio. When the rate of return is less than the discount rate (r< k), the price per share increases as the dividend payout ratio increases Thus the basic Gordon model leads to dividend policy implications as that of the alter model: The optimal payout ratio for a growth firm (r > k) is nil. The payout ratio for a normal firm is irrelevant. The optimal payout ratio for a declining firm (r < k) is 100 percent. 4.2.3 Traditional Position Traditional position expounded eloquently by Graham and Dodd holds that the stock market places considerably more weight on dividends than on retained earnings according to them: Their view is expressed quantitatively in the following valuation model Where, P is the market price per share, D is the dividend per share, E is the earnings per share, and m is a multiplier. According to this model, in the valuation of shares the weight attached to dividends is equal to four times the weight attached to retained earnings. This is clear from following version of the above equation in which E is replaced by (D + R). The weights provided by Graham and Dodd are based on their subjective judgments and not derived from objective, empirical analysis. Notwithstanding the subjectivity of these weights, the major contention of the traditional position is that a liberal payout has a favorable impact on stock price 4.2.4 Miller and Modigliani Position Miller and Modigliani (MM, hereafter) have advanced the view that the value of a firm solely on its earning power and is not influenced by the manner in which its Earnings are split between dividends and retained earnings. This view, referred to as the “dividend irrelevance” theorem, is presented in their celebrated 1961 article. In this article MM constructed their argument on the following assumptions. Capital markets are perfect and investors are rational: information is freely available, transactions are instantaneous and costless, securities are divisible, and no investor can influence market prices. Floatation costs are nil. There are no taxes. Investment opportunities and future profits of firms are known with certainty (MM drop this assumption later). Investment and dividend decisions are independent. The substance of MM argument may be stated as follows: If a company retains earnings instead of giving it out as dividends, the shareholder enjoys capital appreciation equal to the amount of earnings retained. If it distributes earnings by way of dividends instead of retaining it, the shareholder enjoys dividends equal in value to the amount by which his capital would have appreciated had the company chosen to retain its earnings. Hence, the division of earnings between dividends and retained earnings is irrelevant from the point of the shareholders. To prove their argument MM begin with the simple valuation model: Where P0 is the market price per share at time 0 D1 is the dividend per share at time 1