Question 2 Sohar Construction Company is currently a debt free company and is considering a buy-back of ordinary shares via an open market purchase, borrowing to do so. You have been commissioned to report on the likely impact of two alternative policies, depending on the level of sales and operating profit for its products. You are given the following information: Level of sales PBIT/EBIT Probability Weak RO 10 m 0.3 Average RO 100 m Strong RO 190 m Equity is currently RO 200 million at book value. Tax is paid at 15 per cent. Two alternative share buy-back programmes are under consideration: 0 Borrowing RO50 million at 5 per cent. (ii) Borrowing RO 100 million at 5.5 per cent. 0.4 0.3 Required (a) Calculate the current, and potential expected annual return on equity (ROE) under each programme. (16 Marks) (b) Calculate the expected value of Sohar Construction Company ROE under each scenario. (9 Marks) (Total 25 Marks) Question 3 Salalah Plastic Company is engaged in manufacturing plastic bottles. The organization has total capital of OMR 250,000. The organization has a target capital structure of 55% equity and 45% debt. The organization's forecasted net income is OMR 180,000. a. Calculate the residual income based on the net income of OMR 180,000? (6 Marks) b. Calculate the target pay-out ratio? (6 Marks) Assume if the organization's forecasted income OMR 100,000. C. Advice the management what they should do if the net income has dropped to OMR 100,000? (5 Marks) d. Advise the management of the company about various dividend policies? (8 Marks) (Total 25 Marks)