Question

Leila owns 14% of the ordinary share of Datafarm Ltd. Assume dividends from Datafarm is the only income Leila has and she has no savings. In early March, 2020, Datafarm Ltd reported net profits after tax of $1,000,000 for the year, 2019 (1 January to 31 December, 2019), and announced due to the effect of COVID 19 Global pandemic it expects net profits after tax for the current year, 2020, to be 30% lower than last year’s figure. The company currently has a dividend payout ratio of 30%, which it will apply for the annual dividend for 2019, payable in July 2020, but it will reduce the dividend payout ratio to 20% for the dividend for 2020, payable in July, 2021. In July, 2021, Leila wishes to spend $45,000. How much can she consume in July, 2020 if the capital market offers an interest rate of 9% per year?

Answer 1

AS WE KNOW, LEILA OWNS 14% OF ORDINARY SHARE OF DATAFARM LTD AND

LEILA GOT DIVIDEND OF $42000($1000000*30%=$300000*14%=$42000) IN JULY 2020 FOR THE YEAR 2019

AS WE KNOW, DIVIDEND PAYOUT RATIO REDUCED TO 20% FROM 30% FOR THE YEAR 2020,

SO LEILA WOULD GET DIVIDEND OF$19600($1000000-30%=$700000*20%=$140000*14%=$19600) IN JULY 2021 FOR THE YEAR 2020.

THE CAPITAL MARKET OFFERS INTEREST RATE OF 9% PER YEAR , THEREFORE IN JULY 2020 SHE'LL GET INTEREST ON $42000 AT THE RATE OF 9% PER YEAR FOR 6 MONTHS (JAN 2020-JUNE 2020) i.e. $42000*9%*6/12=$1890

SO IN JULY 2020 SHE HAS $42000+$1890=$43890

SIMILARLY IN JULY 2021, SHE WILL BE GETTING 9% OF INTEREST ON $19600 FOR 6 MONTHS(JAN 2021-JUNE 2021)

THEREFORE SHE'LL GET INTEREST OF $882($19600*9%*6/12)

THEREFORE SHE HAS TOTAL MONEY IN JULY 2021 $20482($19600+$882)

SHE WISHES TO SPEND $45000 IN 2021

SO TO FIND OUT HOW MUCH SHE CAN CONSUME JULY 2020 WE WILL HAVE TO SUBTRACT THE INCOME OF JULY 2021 FROM EXPENSES OF JULY 2021 AND THE REMAINING EXPENSE OF JULY 2021 WOULD BE SUBTRACTED FROM THE INCOME OF JULY 2020

EXPENSE OF JULY 2021- INCOME OF JULY 2021=$45000-$20482=$24518

SO, $24518 IS THE AMOUNT WHICH SHE NEEDS TO SAVE FROM INCOME OF JULY 2020

THEREFORE, THE AMOUNT SHE CAN CONSUME IN JULY 2020 IS $43890-$24518=$19372