Question

Question 2.1 (8 Marks)
Roads Ltd is a construction company that builds roads and related civil projects. The company recently faced increased calls from investors to pay dividends due to the perceived lack of new profitable projects in a low growth economy. The company has, in spite of weak business sentiment, maintained a stable profit margin. At a recent meeting, the board resolved to adopt a residual approach to dividend payments. You have been tasked with recommending the dividend that should be paid at the end of the 2018 financial year.
The company expects to have earnings available to common shareholders of R 60 million and it will have five million shares in issue at the end of the financial year. Its project schedule for the next financial year is as follows:

The company has a WACC of 8% and a target debt ratio of 60%.
Required:
Determine the amount of earnings available to common shareholders that could be paid out as a divided according to the residual policy. Create a brief report for the board showing the projects that would be undertaken and also determine the dividend that could be paid.

Answer 1

Answer:-

It has been expressed that the organization wishes to utilize the remaining profit strategy. Here, the income availalble to the organization are R 60Million

The obligation value blend that is proposed in 60%:40%. The all out expense for the ventures is 20+15+21+16=R 72 million

The aggregate sum that will be financed in the proportion of 60% obligation and 40% value for example 60% of 72 = R43.2 million by Debt and R 28.8 million by method of value

Profit: The quantity of value shares is 5 million. The leftover income, in the wake of putting resources into the ventures is 60-28.8 = R 31.2 million. Separating this with number of offers we get R 6.24, which is the profit to be paid

Some more perspectives that should be considered in above arrangement:

1. The measure of R 60 M is thought to be accessible at starting for interest in ventures.

2. There will be some expansion to reveneues by the undertakings. Notwithstanding, the expansion will be over some stretch of time and the expansion in current year can't be resolved with the figure of IRR alone

3. All tasks appear to be reasonable as for IRR. IRR > WACC