Dividend Payout Ratio - PDF

Answer 1
a)
Dividend to be received in May 2018 (in $)
= Net profit for 2018 x share % x dividend pay-out ratio
= 600000 x 15% x 75%
= 67,500
Dividend to be received in May 2019 (in $)
= Net profit for 2018 x (1 + growth rate) x share % x dividend pay-out ratio
= 600000 x (1 + 30%) x 15% x 75%
= 87,750
Amount required in late May 2019 (in $) = 100,000
Dividend to be received in May 2019 (in $) = 87,750
Remaining (in $) = 100000 - 87750
= 12,250
Value of 12,250 in May 2018 (in $)
= Present value of 12,250 for one year at interest rate of 10%
= 12250 / (1 + 10%)
= 11,136
She can consume in May 2018 (in $) = 67500 - 11136
= 56,364
b)
Discount rate = 6%
Cost of System P (in $) = 200,000

Useful life (in years) = 3
Operating cost per annum (in $) = 10,000
Present value annuity factor for 3 years at 6% = 2.6730
Annual Equivalent cost (in $)
= (Cost of system / PVAF) + operating cost
= (200000 / 2.6730) + 10000
= 84,822
Discount rate = 6%
Cost of System Q (in $) = 240,000
Useful life (in years) = 4
Operating cost per annum (in $) = 12,000
Present value annuity factor for 4 years at 6% = 3.4651
Annual Equivalent cost (in $)
= (Cost of system / PVAF) + operating cost
= (240000 / 3.4651) + 12000
= 81,262
Since AEC of system Q is less than that of system P. System Q should be selected.
c)
Face value of Notes (in $) = 1,000.00
Coupon rate per annum = 14%
Interest amount (in $) = Face value x coupon rate
= 1000 x 14%
= 140.00

Required rate of return = 18%
As per details given in the question, payment will be done as given below.
Particulars Amount ($)
Payment year
no.
Interest of May-19 paid in May-23 140.00 5
Interest of May-20 paid in May-23 140.00 5
Interest of May-21 paid in May-21 140.00 3
Interest of May-22 paid in May-22 140.00 4
Interest of May-23 paid in May-23 140.00 5
Repayment 1,000.00 5
Yea
r Amount PVF PV
3 140.00 0.6086 85.21
4 140.00 0.5158 72.21
5 1,420.00 0.4371 620.70
778.11
Current value of each unsecured note (in $) = 778.11
Answer 4
a)
Tax rate = 30%
Cost of capital = 10%
Working capital requirement (in $) = 30,000
New Trucks
Cost of each truck (in $) = 500,000
Total cost of truck (in $) = Cost of each truck x 2
= 500000 x 2

= 1,000,000
Useful life of new trucks (in years) = 4
Total depreciation on new trucks (in $) = 1000000 / 4
= 250,000.00
Total salvage value new trucks (in $) = 150000 x 2
= 300,000
Savings in storage costs (in $) = 50,000
Savings in labour costs (in $) = 200,000
Tax deductible expenses in year 2 (in $) = 40,000
Tax deductible expenses in year 3 (in $) = 50,000
Old Trucks
Carrying value of old trucks (in $) = Cost of truck x 3 x (1 - 20%)
= 250000 x 3 x (1 - 20%)
= 600,000
Sale price of old trucks (in $) = 100000 x 3
= 300,000
Initial cash outflow (in $) = Working capital + cost of new trucks
= 30000 + 1000000
= 1,030,000
Loss on sale of old trucks (in $)
= Carrying value of old trucks - Sale price of old trucks
= 600000 - 300000
= 300,000

Tax savings on loss (in $) = 300000 x 30%
= 90,000
Net cash outflow on sale of old trucks (in $)
= Loss on sale of old trucks - tax savings
= 300000 - 90000
= 210,000
Profit on sale of old trucks (in $)
= Sale price of old trucks - Carrying value of old trucks
= 300000 - 0
= 300000
Tax on profit (in $) = 300000 x 30%
= 90,000
Net cash inflow on sale of new trucks (in $)
= Profit on sale of old trucks - tax on profit
= 300000 - 90000
= 210,000
Total terminal cash inflow
= Working capital - Net cash outflow on sale of old trucks + Net cash inflow
on sale of new trucks
= 30000 - 210000 + 210000
= 30,000
Year 1 2 3 4
Savings in storage costs 50,000 50,000 50,000 50,000
Savings in labour costs 200,000 200,000 200,000 200,000
Less: Depreciation -250,000 -250,000 -250,000 -250,000
Less: Overhauling expenses -40,000 -50,000
Profit before tax - -40,000 -50,000 -
Add: Tax savings - 12,000 15,000 -
Net profit - -28,000 -35,000 -

Add: Depreciation 250,000 250,000 250,000 250,000
Cash flow from
operations 250,000 222,000 215,000 250,000
Year Cash flow PVF PV
0 -1,030,000 1.0000 - 1,030,000.00
1 250,000 0.9091 227,272.73
2 222,000 0.8264 183,471.07
3 215,000 0.7513 161,532.68
4 280,000 0.6830 191,243.77
- 266,479.75
Net Present Value (in $) = -266,479.75
b)
No. Company should not buy new trucks.
Company should not accept this proposal because NPV is negative. It means there will be
loss of $266,479.75 on purchase of new trucks given the existing circumstances.