QUESTION ONE [10]

1.1. Explain what a residual dividend policy is. (2)

1.2. Blippi Ltd follows a strict residual dividend policy. Their debt equity ratio is 2:1.

1.2.1 If their profits are R280 000 for the current year, what is the maximum amount of capital spending possible with no new equity? (2)

1.2.2. If planned investment outlays for the current year are R850 000, will Blippi be able to pay a dividend? (2)

1.2.3 Does Blippi Ltd maintain a constant dividend payout? Explain. (2)

1.3 Explain if retained earnings are a free source of finance for the business. (2)