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Can anyone solve this and put solution Thks:)

Forums › ACCA Forums › ACCA FM Financial Management Forums › Can anyone solve this and put solution Thks:)

  • This topic has 0 replies, 1 voice, and was last updated 13 years ago by ashminder.
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  • June 6, 2012 at 11:13 am #53158
    ashminder
    Member
    • Topics: 3
    • Replies: 4
    • ☆

    Durham Co is a utility business that supplies gas to around 9 million customers.
    Profits have remained stable over recent years and after-tax profits for the most recent year were $80 million. The dividend policy of the company has always been fairly generous and the dividend for the most recent year, which has just been paid, was in line with the company’s normal dividend payout ratio of 75%.
    The board of directors recently met to discuss the future strategy of the company. At the meeting, the chief executive stated that profits would remain stable for the foreseeable future unless there was a change in strategy. He believed, however, that the company could increase profits by expanding its range of services to customers through providing credit card and electricity services. This, however, would require additional finance and the only realistic way in which it could be raised would be through retained profits. Given the amount of finance required, it would be necessary for dividends to shareholders to be reduced in future years.
    The chief executive set out two possible scenarios for expansion, both of which required the same initial investment. Each, however, required a different level of investment in future years and each produced a different rate of growth.
    The following figures relating to each scenario were produced by the chief executive:

    Scenario Div.Pay out Growth Ratein profit Required return by shareholder

    1 30% 10% 13%
    2 45% 7% 11%

    Required:
    (a) Evaluate each scenario and state, with reasons, whether it would be
    worthwhile to embark on an expansion programme. (8 marks)

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