Financial Management and Control - DFA3021Y (5) Question 4 (25 marks) is The statement of financial position of Royalest Ltd, a stock-exchange listed company provided below. Statement of Financial Position as at 31 December 2016 Rs million Rs million 425.00 178.50 220.40 823.90 Assets Non-Current Assets Land and Buildings Furniture and Fittings Plant and Equipment Current Assets Inventory Trade Receivables Prepayments Total Assets 29.80 45.75 3.75 79.30 903.20 Equity and Liabilities Equity Ordinary Share Capital Retained Earnings 415.00 95.75 510.75 90.00 11% Preference Share Capital 600.75 170.00 Non-Current Liabilities Long Term Borrowings Current Liabilities Trade Payables Accruals Bank Overdraft Total Liabilities Total Equity and Liabilities 51.20 10.75 70.50 302.45 903.20 An ordinary share of Royalest Ltd, which was issued at Rs2.00 per share, is currently traded at Rs2.75 per share. Ordinary dividend paid by the company amounted to Rs62.25 million for the year ended 31 December 2016 and the dividends of the company have been growing by an average rate of 4% per year in recent years. The risk free rate and the average return on the market is 5% per year and 9% per year respectively. The long term borrowings of the firm consist of debentures which are redeemable in 7 years' time. The debenture pays annual interest of 8% and has a par value of Rs1,000 per debenture. The current market value of one debenture is Rs925. Preference shares of Royalest Ltd were issued at Rs1.50 per share and one preference share is currently traded at Rs1.80. Financial Management and Control - DFA3021Y (5) Interest on bank overdraft is calculated every month and the nominal interest on bank overdraft is 8.4% per annum. Royalest Ltd pays tax on profit at the rate of 20% per annum. Required Using market values where appropriate, calculate the weighted average after tax cost of capital of Royalest Ltd. [14 marks] (b) Explain four factors that can affect the dividend policy of a firm. [6 marks] (c) Explain the Pecking Order Theory. [5 marks]