Taco Ltd is a growth-oriented company 75% 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 had no further funds to invest. There were, however, several profitable investments under consideration for Taco Ltd. At that time, the financier agreed to invest in the company but 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.

Taco Ltds 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 after-tax profit for the past year amounted to R600 million.

The company has the following investment opportunities:

REQUIRED:

2.1 Apply the residual dividend policy and determine the amount (if any) that should be distributed as a dividend. (10 marks)

2.2 Calculate the dividend pay-out and retention ratios. (5 marks)

\begin{tabular}{|l|l|l|} \hline Project & Cost (Rm) & IRR (\%) \\ \hline A & 180 & 16 \\ \hline B & 420 & 14 \\ \hline C & 240 & 13 \\ \hline D & 210 & 10 \\ \hline E & 270 & 9 \\ \hline \end{tabular}