Answered step by step
Verified Expert Solution
Question
1 Approved Answer
At the beginning of their financial year, Chocolate Inc has engaged you to determine the best method for them to repay their existing loan
At the beginning of their financial year, Chocolate Inc has engaged you to determine the best method for them to repay their existing loan over the next 2 years. The current outstanding amount on their loan is $2 million at an interest rate of 6%. Chocolate Inc wants stability in their dividends and hopes to achieve a growth rate of 2% in dividends paid every year. To carry out the analysis, you have been given the following information: Estimated revenue for the year is $10 million and this will grow by 10%. Estimated total operating expenses are $6 million and this will grow by 8%. Depreciation for the year will be $2 million and is expected to remain constant. Annual change in non-cash working capital is $500,000 for the next 2 years. Tax rate is 40%. What is the loan amount that Chocolate Inc should repay in the first year such that it maximises the dividends that can be paid out? a) What is the amount of the outstanding loan that Chocolate Inc should repay in the first year, such that it maximises the dividends that can be paid out? (14 marks) b) Assuming that Chocolate Inc wants their total repayment (interest and principal) to be equal for both years, what should be the total dividends paid out in the second year? (6 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started