QUESTION 3 (17 marks) Nolt Ltd is a growth-oriented company. Seventy-five per cent is owned by its directors and 25% is owned by an outside financier. The company was formed fours year ago by the directors, but after two years the company could not raise further loans and the directors have no further funds to invest. There were, however, a number of profitable investments available. At that time the financier agreed to invest in the company, but indicated that he would not like the debt ratio to exceeds 40% because he believed that the company was exposed to a high degree of business risk and should therefore take a conservative financial position. Nolt Ltd's interest rate on its debt is a constant 10%; its cost of ordinary shares funding from retained earnings is 14%; and its marginal tax rate is 28%. The company has the following investment opportunities: FIN3701/101/3/2020 Project Cost (Rm) 180 420 240 210 270 IRR 16% 14 13 B C 10 Profit for the past year amounted to R900m after-tax. REQUIRED: 3.1 Apply the residual dividend policy and determine the amount (if any) that should be distributed as a dividend to calculate both the pay-out and retention ratios. What do you think the financier's attitude would be to dividends? Explain. 3.2 QUESTION 3 (17 marks) Nolt Ltd is a growth-oriented company. Seventy-five per cent is owned by its directors and 25% is owned by an outside financier. The company was formed fours year ago by the directors, but after two years the company could not raise further loans and the directors have no further funds to invest. There were, however, a number of profitable investments available. At that time the financier agreed to invest in the company, but indicated that he would not like the debt ratio to exceeds 40% because he believed that the company was exposed to a high degree of business risk and should therefore take a conservative financial position. Nolt Ltd's interest rate on its debt is a constant 10%; its cost of ordinary shares funding from retained earnings is 14%; and its marginal tax rate is 28%. The company has the following investment opportunities: FIN3701/101/3/2020 Project Cost (Rm) 180 420 240 210 270 IRR 16% 14 13 B C 10 Profit for the past year amounted to R900m after-tax. REQUIRED: 3.1 Apply the residual dividend policy and determine the amount (if any) that should be distributed as a dividend to calculate both the pay-out and retention ratios. What do you think the financier's attitude would be to dividends? Explain. 3.2