Question

Method	Required Parameter	UoM	Years
			2016
Constant Payout Ratio Method	Net Income	Amount	2,843,186
	Dividend Paid	Amount	1,192,827
	Payout Ratio	%	????
Dividend Constant Growth Method	Dividend Paid	Amount	1,192,827
	Growth	%	????
Residual Distribution Method	Net Income	Amount	2,843,186
	Retained Earning	Amount	1,650,359
	Dividend Paid	Amount	1,192,827
	Payout Ratio	%	????

Find out constant payout ratio in %, Constant Growth rate in %, Residual Distribution pay out ratio in %.

 

Based on your working, please specify with proper justification that which method the company is following to pay dividends?
Constant Payout Ratio Method	Dividend Constant Growth Method	Residual Distribution Method	Justification
________________________Mark with "YES" _______________________

Answer 1

 

Cost of capital for X , K = 10%

Let Cash flows be CF1, Cf2, CF3.....CF8

Initial investment, I = - $ 890,000

NPV of Project X = - I + CF1/ (1+ k) + CF2/(1+K)^2 + CF3/(1+K)^3 + CF4/(1+K)^4 + CF5/ (1+K)^5 + CF6/(1+K)^6 + CF7/(1+K)^7 + CF8/(1+K)^8

= -890,000 +  ( 152,000)/(1+10%) + ( 152,000)/(1+10%)^2+ ( 152,000)/(1+10%)^3+ ( 152,000)/(1+10%)^4+

(152,000)/(1+10% )^5+ (152,000)/(1+10%) ^ 6+ ( 152,000)/(1+10%)^7 + 263,000 /(1+10%)^8 

= -$ 27,308.90

 

For Payback period, Payback period is the number of periods it takes for the cash flow to be repaid

Adding Cash flows from Year 1 to year 5 ,we get

152,000*5 = $ 760,000

The cumulative cash flow needed is 890,000 ie another $ 130,000 ( 890,000 - 760,000)

 

Hence, Payback period = 760,000 + 130,000/ 152,000 

                                             = 5.86 years.

 

iii)

The equation for IRR i is

890,000 = ( 152,000)/(1+i) + ( 152,000)/(1+i)^2+ ( 152,000)/(1+i)^3+ ( 152,000)/(1+i)^4+ ( 152,000)/(1+i)^5+

(152,000)/(1+i) ^ 6+ ( 152,000)/(1+i)^7 + 263,000 /(1+i)^8 

 

Formulae

 

Cost of capital for X , K = 10%

NPV of Project X = -$ 27,308.90

 

Payback period = 5.86 years.