growth rates and dividend capacity

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    jinkies
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    under what circumstances should we use the earnings growth rate in the dvm instead of the dividend growth rate?/??/

    plus,can you please explain the dividend capacity calculation part b dec 2007 qs 1-how did we get the unfunded wc amount and whats the logic behind subtracting the dividend payment from the cost of sale amount?(im talking with reference to kaplan’s solution)


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    John Moffat
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    The only time really that you would use the earnings growth rate is if you were valuing the business for taking it over (on the basis that the purchaser could decide on their own dividend policy).

    With regard to D2007 Q1(b), I do not have a Kaplan book but it seems they must have just copied the examiners original answer, which is a bit stupid. The BPP answer is much more sensible and is as follows:

    The max dividend capacity (before working capital) is 114 – 80 – 10 = 24M.

    However, from the cash flow statement in part(a), the total change in working capital is 1.1 + 0.5 + 3.5 = 5.1M.

    This leaves dividend capacity of 24M – 5.1M = $18.9M

    (This is a little different from the examiners original answer, but is more sensible and is approved by the examiner)


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    jinkies
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    but why are we subtracting the 5.1 amount?i mean it’s a net positive change in wc which has been rightfully added in the 114 figure…?

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