Question

In: Accounting

Leila owns 14% of the ordinary share of Datafarm Ltd. Assume dividends from Datafarm is the...

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 1 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

Solutions

Expert Solution

AS WE KNOW, LEILA OWNS 14% OF ORDINARY SHARE OF DATA FARM 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 INTERESTED 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


Related Solutions

Cranberry Medical Ltd. paid a dividend of $5.00 per share on its ordinary shares yesterday. Dividends...
Cranberry Medical Ltd. paid a dividend of $5.00 per share on its ordinary shares yesterday. Dividends are expected to grow at a constant rate of 10% for the next two years, at which point the dividends will begin to grow at a constant rate indefinitely. If the share is selling for $50 today and the required return is 15%, what is the current dividend yield? What is the growth rate of the expected annual dividend after year two?
Hudaverdi Ltd pay current dividends of $0.61 per share with these dividends expected to grow at...
Hudaverdi Ltd pay current dividends of $0.61 per share with these dividends expected to grow at a rate of 2% per year in perpetuity. Hudaverdi Ltd shares are currently trading at $6.91 per share. What is the cost of equity finance for Hudaverdi Ltd? Give your answer as a percentage per annum to 1 decimal place. Cost of equity =  % pa Gertrude's Great Gloves issue bonds with a face value of $1,000, paying interest at j2 = 6.75%, redeemable in...
​RIO's ​ company’s ordinary shares are expected to pay​ $2.22 per share in dividends for 3...
​RIO's ​ company’s ordinary shares are expected to pay​ $2.22 per share in dividends for 3 years and after which the dividends are expected to grow at 1.9% annually forever. Company​ ABC's shares have a beta of 1.41. The​ long-term return of ASX200 is 9​% and the market risk premium is 5​%. a.What is the expected return of​ RIO’s shares according to the​ CAPM? b.What is the implied price per​ share?
Barney Ltd owns all of the share capital of Betty Ltd. Theincome tax rate is...
Barney Ltd owns all of the share capital of Betty Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2022 and 30 June 2023. On 10 June 2022, Barney Ltd sold inventories to Betty Ltd for $16 000 in cash. The inventories had previously cost Barney Ltd $12 000. 60% of these inventories were unsold by Betty Ltd at 30 June 2022 and 30% at 30 June 2023.       On 1 July...
Cook Ltd owns all of the share capital of James Ltd. The income tax rate is...
Cook Ltd owns all of the share capital of James Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2019 or 30 June 2020. In January 2020, Cook Ltd sells inventories to James Ltd for $10 000 in cash. These inventories had previously cost Cook Ltd $7 000, and remain unsold by James Ltd at the end of the period.                                                              In February 2020, Cook Ltd sells inventories to James Ltd...
Please answer or give me a hint for the following question. T Company’s ordinary share dividends...
Please answer or give me a hint for the following question. T Company’s ordinary share dividends have grown over the past 5-year period from $0.69 per share to $0.89 (today). Assume that T’s dividends are expected to grow at this rate for the foreseeable future. T’s stock is currently selling for $10.50 per share. New common stock can be sold to net the company (ie after capital raising costs) $9.90 per share. Determine the costs of internal and external equity...
ABC company's ordinary shares are expected to pay $3 per share in dividends in 4 years...
ABC company's ordinary shares are expected to pay $3 per share in dividends in 4 years and after which the dividends are expected to grow at 2% annually forever. Company ABC's shares have a beta of 1.75. The long-term return of ASX200 is 9% and the return of T-bonds is 4% (a) What is the expected return of ABC's shares according to the CAPM? (b) What is the implied price per share? (c) If the shares are selling for $25/share,...
ABC company's ordinary shares are expected to pay $3 per share in dividends for 6 years...
ABC company's ordinary shares are expected to pay $3 per share in dividends for 6 years and after which the dividends are expected to grow at 2% annually forever. Company ABC's shares have a beta of 1.75. The long-term return of ASX200 is 9% and the market risk premium is 5%. (a) What is the expected return of ABC's shares according to the CAPM? (b) What is the implied price per share?
RIO's company's ordinary shares are expected to pay $2.6 per share in dividends for 6 years...
RIO's company's ordinary shares are expected to pay $2.6 per share in dividends for 6 years and after which the dividends are expected to grow 2.1% annually forever. Company ABC's shares have a beta of 1.4. The long-term return of ASX200 is 9.3% and the market risk premium is 4% a. What is the expected return of RIO's shares according to the CAPM? b. What is the implied price per share?
S Ltd owns all the share capital of R Ltd. The income tax rate is 30%....
S Ltd owns all the share capital of R Ltd. The income tax rate is 30%. The following transactions took place during the periods ended 30 June 2020 or 30 June 2021. On 1 July 2019, S Ltd sold a motor vehicle to R Ltd for $17 000. This had a carrying amount to S Ltd of $12 000. Both entities depreciate motor vehicles at a rate of 10% p.a. on cost. R Ltd manufactures items of machinery which are...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT