Question

QUESTION 1 (5 marks)

In August 2019 Coral Ltd reported net profits after tax of $600,000 for its financial year 2018-–19 and announced its net profits after tax expectation for the next financial year, 2019–20, to be 25% higher than this year’s figure. The company operates with a dividend payout ratio of 70%, which it plans to continue. It will pay the annual dividend for 2018–19 on 1 October, 2019, and the dividend for 2019–20 on 1 October, 2020.

Dan Brown owns 12% of the ordinary share capital of Coral Ltd. In October, 2020, Dan believes he will need $30,000 for consumption and he also wishes to pay off his home loan of $70,000. If the dividend from Coral Ltd is his sole income, how much can he consume in October 2019? The capital market offers an interest rate of 9% pa.

Answer 1

Net profit for the year 2018-19 = $ 600,000

Dividend payout ratio = 70 %

Dan brown holds 12 % of shares. Hence his part in the profits will be 12 %.

Therefore,

Dividend declared = 600,000 * 70 % = 420,000

Thus Dan brown share = 420,000 * 12 % = $ 50,400.

Net profit for the year 2019-20 is expected to be 25 % higher.
Hence profit for the year 2019-20 is $ 600,000 * 1.25 = $ 750,000

Thus dividend payout = $750,000 * 70 % = $ 525,000

and dan brown share = $ 525,000 * 12 % = $ 63,000.

Now total amount required by the Dan brown in 2020 is $ 30000 for consumption and $ 70000 for house loan.

Therefore total amount required = 30000 + 70000 = $ 100,000.

Total earning of the Dan brown for two years = $ 50,400 + $ 63,000 = 113,400 (plus interest on the remaining amount from $ 50,400 which is not consumed @ 9 %)

Thus in 2019, his total earnings is $ 50,400 and thus he can consume maximum $ 50,400. (as required by the question)

Suppose he consumes $ 30,000. thus remaining amount i s$ 20,400 on which he will earn an interest of $ 1836 ($20,400 * 9%)

Thus the total amount on 1st october 2020 = 20,400 + 1836 + 63000 = $85,236