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The Giant Machinery has the current capital structure of 65% equity and 35% debt. Its net income in the current year is $250,000. The company is planning to launch a project that will require an investment of $175,000 next year. Currently, the share of Giant machinery is $25/share.
Required:
a) How much dividend Giant Machinery can pay its shareholders this year and what is the dividend payout ratio of the company? Assume the Residual Dividend Payout Policy applies.
b) Little Equipment for Hire is a subsidiary in the Giant Machinery and currently under the liquidation plan due to the severe contraction of operation due to corona virus. The company plans to pay total dividend of $2.5 million now and $ 7.5 million one year from now as a liquidating dividend.
The required rate of return for shareholders is 12%. Calculate the current value of the firm’s equity in total and per share if the firm has 1.5 million shares outstanding.My issue starts from here :
1. How do I calculate the dividend Giant Machinery can pay its shareholders this year ? In case of dividend payout ratio calculation , Ratio = Total dividend paid[Calculated just now] / Earning [$250,000], isn’t this the method of calculation of ratio ?
2. How do I solve requirement b ?
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers (BPP and Kaplan) – they have answers and explanations.
The dividend they can pay is the earnings less the amount needed to be held back for the dividend.
For requirement (b) the market value is the PV of the future expected dividends discounted at the shareholders required rate of return. This is all explained in full in my free lectures.
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