Question 4 (10 Marks)

Zion Limited is a growth-oriented company, 75% of which is owned by its directors and 25% of which is owned by an outside financier. The company was formed five years ago by the directors, but after three years, the company could not raise further loans and the directors had no further funds to invest. There were, however, several profitable investments available. At that time the financier agreed to invest in the company, but he indicated that he would not like the debt ratio to exceed 40% because he believed that the company was exposed to a high degree of business risk and should therefore take a conservative financial position.

Investment opportunities for the coming year are:

ProjectCost(millions)IRRsolar power plant6017%windfarm14015%desalination plant8012%cultural tourism project7013%logistics hub908%

Profits for the past year amounted to N$300 million after tax, and the cost of capital is 11%.

Required:

4.1 Apply the residual dividend policy and determine the amount (if any) that should be distributed as a dividend.

4.2 What do you think the financiers attitude would be to dividends? Explain, using

relevant theories.