i.Your DPS is Rs.0.55 out of EPS of Rs.1.25. The price of stock is Rs.10.50 per share. The value of total assets is Rs.9 million with 40% by debt. In preceding years, your return on equity (ROE) was 16%, with expectation to continue. (03)

a.Calculate the growth rate growth rate (growth rate = Retention rate x return on equity)

b.What is the required return on the stock?

c.If you change the dividend policy with an annual dividend of Rs.1.30 per share, what would be new growth rate and required return if everything else remains same?

ii.In 2000, you paid dividends of Rs.2,500,000 out of net income of Rs.9.8 million. You had constant long-run growth rate of 10%. However, in 2001, earnings are supposed to be Rs.13.4 million and you need investment of Rs.7.4 million. You do not expect to continue the growth of 2001 and will sustain the original growth rate of 10%. The capital structure is 40% debt and 60% equity. (03)

Required: Calculate total dividends for 2001 under following alternatives:

a.2001 dividend payment will remain at the long-run growth rate in earnings.

b.Dividend payout ratio of 2000 will continue.

c.You follow residual dividend model.

Question No 5

Answer the following.

i.You want to buy a new plant with a price of Rs. 400,000. The borrowing cost is 10% interest rate to be paid at the end of each year. In the event the loom is purchased, the maintenance fee is Rs.10,000 per year paid at the end of each year. The depreciation falls in the MACRS 5-year class, rates are 30%, 20%, 10%, and 09%. The tax is 40%.

Alternatively, the plant can be taken on lease for Rs. 85,000 upon delivery with 4 more annual rentals of Rs. 85,000 to be made at the end. This alternative includes maintenance requirement. After 04 years the asset's salvage value is expected to be Rs. 20, 000.

Required: What do you suggest should the plant be leased or purchased? Why?

make a dummy Balance Sheet of your own with dummy values of Assets and Liabilities and show the accounting treatment of operating and financial leases with brief explanation of each.