Question
Kwaito Sounds had a dividend payout ratio of 25% in the financial year ending June 30, 2020. The company is seeking your advice on whether
Kwaito Sounds had a dividend payout ratio of 25% in the financial year ending June 30, 2020. The company is seeking your advice on whether it should maintain this payout ratio. It is also considering a number of major investment opportunities for the coming year. These are listed in Exhibit 4 below. The company intends to maintain its working capital at the same percentage of revenues next year as it has this year. The beta calculated in Question 2A (b) is considered to be a good estimate of the beta for the next five years.
Exhibit 4: Kwaito Investment opportunities in the next year
PROJECT | Project Total Investment (R' million)
| IRR on project (using CF to Equity) | Beta (Levered) |
A | 15 | 16% | 1.60 |
B | 30 | 15% | 1.25 |
C | 25 | 12.5% | 1.00 |
D | 20 | 11.5% | 0.50 |
a. If revenues, net income and depreciation are all expected to grow at 20% next year, and the firm maintains its existing capital structure (in market value terms), how much can the firm afford to pay out as dividends after meeting working capital and capital budgeting needs? [12 marks] b. The company's current cash balance is R10 million. What will happen to this cash balance if Kwaito Sounds maintains its payout ratio at 25% next year? [3 marks]
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