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Cozine Inc.

(a) Cozine Inc. has recently obtained a listing on the Stock Exchange. 90% of the company’s shares were previously owned by members of one family but, since the listing, approximately 60% of the issued shares have been owned by other investors.

Cozine’s earnings and dividends for the five years prior to the listing are detailed below:

Years prior to listing

Profit after tax ($)

Dividend per share (cents)
















Current year

5,500,000 (estimate)


The number of issued ordinary shares was increased by 25% three years prior to the listing and by 50% at the time of the listing. The company’s authorised capital is currently $25,000,000 in 25¢ ordinary shares, of which 40,000,000 shares have been issued. The market value of the company’s equity is $78,000,000.

The board of directors is discussing future dividend policy. An interim dividend of 3.16 cents per share was paid immediately prior to the listing and the finance director has suggested a final dividend of 2.34 cents per share.

The company’s declared objective is to maximise shareholder wealth.


i. Comment upon the nature of the company’s dividend policy prior to the listing and discuss whether such a policy is likely to be suitable for a company listed on the Stock Exchange.
ii. Discuss whether the proposed final dividend of 2.34 cents is likely to be an appropriate dividend: о If the majority of shares are owned by wealthy private individuals; and о If the majority of shares are owned by institutional investors.

B. The company’s profit after tax is generally expected to increase by 15% per year for three years, and 8% per year after that. Cozine’s cost of equity capital is estimated to be 12% per year. Dividends may be assumed to grow at the same rate as profits.


Use the dividend valuation model to give calculations to indicate whether Cozine’s shares are currently under- or over-valued.

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