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Question 3

You are the financial manager of a competitive investment company in South Africa. You have been presented with two possible investments: Pink Limited and Purple Limited as shown below. You have been supplied with the following information regarding the two companies.

As a financial manager you are very concerned about the dividend yield and dividend payout ratio as these will be your indicators of the return on your investments. Required: 3.1 Calculate the dividend yield for both companies. (6) 3.2 Calculate the dividend payout ratio for Pink Limited. (4)

3.3 Calculate the price earnings ratio for Purple Limited. (4)

3.4 With reference to your answers in questions Q.3.1 to Q.3.3, draft a memorandum to management in which you make a recommendation as to which company would be the better investment. Your recommendation should be substantiated with reasons. Assume that the dividend payout ratio of Purple Limited is 42.52% and P/E ratio of The pink is 2.82.

3.5 Investors can use two methods to make money on the stock market. Name one of these methods.

Pink Limited Purple Limited R3 000 000 R4 000 000 R500 000 R800 000 R2 822 400 28% Earnings before interest and tax Long term interest bearing debt Earnings attributable to shareholders Tax rate Share Capital Number of ordinary shares issued Number of ordinary shares authorised Current market price of the share Dividend per share R2 124 000 28% R2 00 000 200 000 1 000 000 R5 000 000 400 000 500 000 R30 R20.00 R5 R3