Question
In 2020, Qaiser Textiles Ltd paid dividends totaling Rs.2,400,000 on net income of Rs.8.9 million. Note that 2008 was a normal year and that for
In 2020, Qaiser Textiles Ltd paid dividends totaling Rs.2,400,000 on net income of Rs.8.9 million. Note that 2008 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 9.5%. However, in 2021, earnings are expected to jump to Rs.12.5 million and the firm expects to have profitable investment opportunities of Rs.9.3 million. It is predicted that Company will not be able to maintain the 2021 level of earnings growththe high 2021 earnings level is attributable to an exceptionally profitable new product line introduced that yearand the company will return to its previous 9.5% growth rate. Qaiserss target capital structure is 45% debt and 55% equity. a. Calculate Qaisers total dividends for 2021 assuming that it follows each of the following policies: (1) Its 2021 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
(2) It continues the 2020 dividend payout ratio. (3) It uses a pure residual dividend policy. b. Assume that investors expect Qaiser to pay total dividends of Rs.8,200,000 in 2021 and to have the dividend grow at 10% after 2021. The stocks total market value is Rs.170 million. What is the companys cost of equity?
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