Images plc is an all-equity financed, Stock Exchange listed business. It has been a steady profit and cash flow generator over recent years, and it has distributed all of its after-tax profit as dividends.

More recently, the business has been actively seeking new investment opportunities.
In the financial year that has just ended, it reported profits of £5m, a figure similar to that of recent years.
Four potential investment projects have been identified, all of which could commence immediately. The estimated cash flows and timings of these projects are as follows:

Each of these projects falls within the same risk class as the business’s existing projects.
It has been estimated that the cost of equity is 15 per cent p.a.
The directors would be very reluctant to raise outside funds to help finance any of the above projects.
What advice would you give the directors as to the level of dividend that should be paid this year?

Transcribed Image Text:

Year Project I m Project II m Project III Project IV m m 0 (2.0) (2.0) (3.0) (1.0) 1 0.75 0.65 0.80 0.50 2 0.75 0.65 0.80 0.50 3 0.75 0.65 0.80 0.50 4 0.65 0.80 5 0.65 0.80