QUESTION FOUR [25]

4.1 Distinguish between:

4.1.1 A participating preference share and a convertible preference share. (3)

4.1.2 Share repurchase and a residual dividend. (3)

4.2 Cody Services has experienced a reasonable trading year. They are deciding whether to pay out R124 000 in accumulated cash in the form of a dividend to shareholders or embark on a share repurchase campaign. Current earnings are R3.60 per share and the share sells for R40. Their abbreviated Statement of Financial Position before paying out the dividend is as follows:

R

Assets

Tangible Assets 200 000

Inventories 20 000

Receivables 30 000

Bank/cash 150 000

Total 400 000

Equity and Liabilities

Equity 310 000

Debt 90 000

Total 400 000

Required:

Evaluate each alternative (i.e.: pay the dividend or repurchase the shares) by calculating the:

4.2.1 Number of shares in issue. (3)

4.2.2 Dividends per share (for the first alternative, i.e. pay the dividend). (3)

4.2.3 New share price (7)

4.2.4 Earnings Per Share (3)

4.2.5 Price-earnings ratio (3)