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Hi, for the sample answer, in part (a) (ii), I understand that the 0.95 is due to the withholding tax of 5% deducted from any dividends remitted by Bowerscots Co. For the Total Dividend Remittance Required, please may I know why is the entire ($20.52m + $12.148m) divided by 0.95?
Thank you.
For Arthuro to be able to pay the dividend that they want to pay (i.e. $0.74 per share) they need to receive a higher amount from Bowerscots. The amount they receive from Bowerscots will only be 95% of the dividend that Bowerscot pays (because of the withholding tax) and therefore we need to divide the receipt required by 95% to find the dividend Bowerscot has to declare.
Oh I see. Please allow me to illustrate to see whether I am correct:
“The dividend capacity required of $88.8m is the result from 90m x 4/3 x $0.74 per share, which is the dividend per share that Arthuro Co wants to retain. Therefore, in order to get this from Bowerscot, Bowerscot needs to declare more at $88.8m / 0.95 = $93.47m to cover the 5% withholding tax. On the other hand, the $76.652m is the forecast dividend capacity of Arthuro Co. Likewise, to get this from Bowerscot, Bowerscot needs to declare more at $76.652m / 0.95 = $80.69m. Also, the $20.52m is the amount remitted to Arthuro Co from Bowerscots, and thus, Bowerscots must declare more at $20.52m / 0.95 = $21.6m to cover the 5% withholding tax.
Overall, the total dividend remittance required will be $93.47m – $80.69m + $21.6m = $34.38m?
And the distribution % required is 95.5%, which is in fact the major proportion of the profit after tax, leaving Bowerscot with only little investment opportunities?
Am I correct or wrong in any of these? Thank you.
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