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Sir, I have 2 different doubts pertaining to this question:
1. in this question’s part a) we could have commented on FCF to equity, right? As in the residual interest formula did not strike the first time I tried attempting this question. It was only dividend payout, dividend cover and FCF to equity(PAT-capex), that came to my mind. so if i would have skipped on residual profit, it would have been fine?
2. “Eartham Co appears to be linking investment and dividend policy by its normal policy of allocating a constant proportion of funds for dividends and therefore a constant proportion of funds to invest. However, the actual level of new investments does not seem to bear much relation to the proportion of funds put aside for investment.”
What is this line trying to hammer home?
3. Sir in part a’ s answer on Iping co. under Benefits, the first line itself under Iping co. states that “Iping Co seems to have adopted a residual dividend policy”. on what grounds is this being said? what’s it that we look at and will know that residual dividend policy is being adopted?
1. It wouldn’t really have been fine because the question was asking about the dividend policies – the idea of paying a fixed dividend or fluctuating dividends and whether or not they are using the cash not paid out as dividend to expand the company. Watch my lectures on dividend policies.
2. With the exception of 2013, Eartham is paying a dividend of around 40% of the profits. The question is what are they doing with the other 60% because they do not appear to be consistently reinvesting it.
3. Iping seems to be deciding how much new investment to make and letting the dividend just be whatever is left (i.e. the residual amount). As the answer says, the more new investment then the more the growth, but on the other hand many shareholders prefer a stable dividend policy.
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