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Dividend policy

Example 1

LL is a large listed company. Its $1 ordinary shares are quoted on the local
stock exchange.

Equity comprises:

 Ordinary share capital ($1 shares) $1,500m

 Reserves $500m.

LL's share price is $1.90 per share. The Board of LL is aware that the market
is expecting LL to pay a dividend of $200m to be paid at the year end, but in
order to fund the investment in an important new project, the Board is
considering offering a scrip dividend of 1 share for every 12 shares held
instead of a cash dividend.

Profit after tax and interest is forecast to be $380 million in the current financial
year.

What is the expected share price of LL after the scrip dividend has been
issued? (to 2 decimal places)

A $0.16

B $1.75

C $1.90

D $2.03

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