Question
Fossi corporation has a project for investment that will cost $60 million. The project has a life of five year and the company can invest
Fossi corporation has a project for investment that will cost $60 million. The project has a life of five year and the company can invest in this project with capital structure of 60% debt and remaining from equity. Sponsors and directors of the company have decided to undertake this project. Based on current nominal interest calculation the project is estimated to provide NPV of $4 million. The management of the company has anticipated that the inflation rate will increase in next six months which will ultimately increase a nominal interest rate which will result in negative NPV of the project.
The company normally follows constant dividend payout ratio policy. As per this policy the company pays out 80% of its total in earnings. As per the instruction of sponsors and directors, the management has started to arrange financing from banks to obtain dates for this project. This project is now the first priority and confidence of sponsors and directors of the company at this project will give global present and strong brand reputation.
(a)Based on the before mentioned scenario, suggest a company with a possible dividend payment strategy keeping in mind the investment appraisal opportunity. Apprise the strategy with logical reasoning
(b) In your opinion, what should be the strategy of the company for dividend payment if future investment opportunities are available? How an invite to be investors will get return if the company of in future investment opportunities? What will be the impact on share price? Apprise a strategy of the company that example.
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