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Problem 1

The Borrowaik Rose Water Company expects to generate net income and have capital expenditures over the next five years as shown. There are three dividend policy options analyzed: 1) treating dividends as residual, 2) maintaining the current dividend of Rs. 1 per share, and 3) maintaining a 50% dividend payout ratio. Under a residual dividend policy, dividends fluctuate each year based on income available. Maintaining the current dividend requires external financing in some years. A 50% payout ratio policy results in the lowest total external financing need over the five years.

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Muhammad Iqbal Lalani
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959 views9 pages

Problem 1

The Borrowaik Rose Water Company expects to generate net income and have capital expenditures over the next five years as shown. There are three dividend policy options analyzed: 1) treating dividends as residual, 2) maintaining the current dividend of Rs. 1 per share, and 3) maintaining a 50% dividend payout ratio. Under a residual dividend policy, dividends fluctuate each year based on income available. Maintaining the current dividend requires external financing in some years. A 50% payout ratio policy results in the lowest total external financing need over the five years.

Uploaded by

Muhammad Iqbal Lalani
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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PROBLEM-1

The Borrowaik Rose Water Company expects with some degree of certai
generate the following net income and to have the following Capital
Expenditures during the next five years:

YEARS NET INCOME CAPITAL EXPENDITURE


1 Rs. 2,000 thousands Rs.
2 1,500
3 2,500
4 2,300
5 1,800

The Company currently has 1 million shares of common stock outstanding and
pay annual dividend of Rs.1 per share.

(a) Determine dividends per share and external financing required in each y
(b) Determine the amount of external financing that will be necessary in ea
(c)  Determine dividends per share and the amounts of external financing th
(d) Under which of the three dividend policies are aggregate dividends (tota
ects with some degree of certainity to
have the following Capital

CAPITAL EXPENDITURE
1,000 thousands
1,500
2,000
1,500
2,000

ommon stock outstanding and

nal financing required in each year if dividend policy is treated as a residual decision.
ng that will be necessary in each year if the present annual dividend per share is maint
mounts of external financing that will be necessary if the dividend pay-out ratio of 50%
s are aggregate dividends (total dividends over five years) maximized? External require
a residual decision.
end per share is maintained.
d pay-out ratio of 50% is maintained
ized? External required financing (total financing over five years) minimized?
SOLUTION-1

(a)

INCOME AVAILABLE DIVIDEND


YEARS FOR DIVIDENDS PER SHARE
(in thousands)

1 1,000.00 1.00
2 - -
3 500.00 0.50
4 800.00 0.80
5 - -

(b) YEARS NET INCOME DIVIDENDS


(in thousands) (in thousands)

1 2,000 1,000
2 1,500 1,000
3 2,500 1,000
4 2,300 1,000
5 1,800 1,000
(c) YEARS NET INCOME DIVIDENDS
(in thousands) (in thousands)

1 2,000 1,000
2 1,500 750
3 2,500 1,250
4 2,300 1,150
5 1,800 900
EXTERNAL
FINANCING
REQUIRED
(in thousands)

-
-
-
-
200
200

CAPITAL EXTERNAL
EXPENDITUR FINANCING
ES REQUIRED
usands) (in thousands) (in thousands)

1,000 -
1,500 1,000
2,000 500
1,500 200
2,000 1,200
2,900
CAPITAL EXTERNAL
DIVIDENDS EXPENDITUR FINANCING
PER SHARE ES REQUIRED
usands) (in thousands) (in thousands) (in thousands)

1.00 1,000 -
0.75 1,500 750
1.25 2,000 750
1.15 1,500 350
0.90 2,000 1,100
2,950
usands)

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