Equity financing, dividend policy and valuation

Section 6 of Module 12 (up to 25% of the paper) joins three topics: how companies raise equity (IPOs, rights issues, placements) and what corporate exercises do to share prices; dividend policy and its theories; and valuation by DCF, dividend discount, multiples and net assets. Expect TERP and DDM calculations and 'which theory explains this' questions.

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Checked against SIDC Module 12 Study Outline (Jul–Dec 2026) Topics 10–12; A. Damodaran, Investment Valuation; Brealey, Myers and Allen, Principles of Corporate Finance; Companies Act 2016 ss.74 and 127. Calculations verified in Python. As at October 2026. Independent prep, not endorsed by SIDC or the SC.

Must-know for the exam

Gordon growth: P0 = D1 ÷ (r − g); needs r > g; D1 = D0 × (1 + g).
Implied return from the Gordon model: r = D1 ÷ P0 + g.
FCFF discounted at WACC gives enterprise value; deduct debt for equity. FCFE is discounted at the cost of equity.
TERP = (N × cum price + new shares × issue price) ÷ (N + new shares).
Bonus issues, splits and consolidations change share numbers and price but not total value.
MM: in perfect markets dividend policy is irrelevant; value comes from investment policy.
Signalling: dividend changes convey management's view; clientele: investors pick payout policies that suit them.
Sustainable growth = ROE × retention ratio.
EV = market capitalisation + debt − cash; EV/EBITDA is neutral to capital structure.
NTA per share = (total assets − intangibles − liabilities) ÷ shares.

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Traps that cost marks

Using D0 in place of D1.
Forgetting to discount the terminal value back to today.
Using the market return instead of the share's own CAPM required return.
Treating firm value as equity value without subtracting debt.
Dividing instead of multiplying by the multiple.
Using market capitalisation instead of enterprise value.
Thinking P/E is capital-structure neutral.
Forgetting to deduct intangibles or liabilities.

Equity financing and corporate exercises

Equity is raised by IPOs, rights issues (pro rata to existing holders) and private placements (to selected investors, quicker but dilutive). Bonus issues, splits and consolidations raise no cash.

Exercise	Example	Result
1-for-4 rights at RM2.00, cum RM3.00	(4 × 3.00 + 2.00) ÷ 5	TERP RM2.80; right RM0.20 per old share
1-for-5 bonus at RM6.00	6.00 × 5 ÷ 6	RM5.00
2-for-1 split at RM4.40	4.40 ÷ 2	RM2.20
5-into-1 consolidation at RM0.08	0.08 × 5	RM0.40

Trap: averaging cum and issue prices equally, or thinking a bonus issue creates value.

Takeaway: value is conserved; only the number of shares and the price per share change (and rights bring in cash).

Dividend policy

Theories: Miller and Modigliani's irrelevance (perfect markets, home-made dividends); bird-in-hand (investors prefer certain dividends); signalling (dividend changes carry information); clientele (investors sort by payout). Policies: residual (pay what is left after positive-NPV projects), constant payout ratio, stable or smoothed dividends. Other forms: share buy-backs (shares may be held as treasury shares under the Companies Act 2016), dividend reinvestment plans.

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