Question

Financial start of Red river ltd at the end of financial year 2018-2019 has the following information.

Sales of $855000, Cost of goods sold $542000, selling expenses of $12000, administration expenses of $6000, depreciation expenses of $35000, interest expenses of $12000 and corporate tax rate of 30%.

The firm is planning a new investment project that requires a cost of $350000. The firms plans a capital structure of 40% equity and 60% debt to finance this project.

1. Calculate the gross profit and operating profit (EBIT) of the company.
2. Identify tax payment and net profit of the company.
3. If the current Closing ordinary shares of the company is 50000 selling for $12 each, complete the PE ratio of the Red river.
4. Determine the dividend amount if any can be paid out to shareholders by applying the residual theory and Calculate the dividend payout ratio:

Answer 1

a]	Sales		$       8,55,000
	Cost of goods sold		$       5,42,000
	Gross profit		$       3,13,000
	Operating expenses:
	Selling expenses	$             12,000
	Administration expenses	$               6,000
	Depreciation expenses	$             35,000
	Total operating expenses		$          53,000
	Operating profit [EBIT]		$       2,60,000
	Interest expenses		$          12,000
	Income before tax		$       2,48,000
b]	Tax at 30%		$          74,400
	Net profit		$       1,73,600
c]	EPS = 173600/50000 =	$                  3.47
	P/E = 12/3.47 =	3.46
d]	Equity required for the new project = 350000*40% =	$         1,40,000
	Residual profit availabe for dividend = 173600-140000 =	$            33,600
	Dividend payout ratio = 33600/173600 =	19.35%