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The board of directors of Masii Limited is divided on whether to adopt a high or low dividend payout policy.
The board of directors of Masii Limited is divided on whether to adopt a high or low dividend payout policy. One of the directors has quoted the ‘dividend discount model’ as proof that the ‘higher the dividends, the higher the share price.’
Required:
Highlight two arguments for and against a high dividend payout policy. (4 marks)
Using a constant growth dividend discount model, evaluate the director’s statement. (6 marks)
Leo Plastics Limited is an all equity financed company. It had three strategic business divisions as on 1 January 2004:
The Polythene division
It has a capital of Sh. 8 million and is expected to produce returns of 11% on capital for the next five years. Thereafter, it will produce returns equal to the required rate of return of 14% for its risk level.
The Paper division
It has a capital of Sh. 12 million and a planning horizon of 10 years. During this planning horizon, it will produce a return of 12% on capital compared with a risk adjusted required rate of return of 15%.
The Container division
It has a capital of Sh. 12 million and a planning horizon of 7 years. The required rate of return on capital is 16% compared with the anticipated actual rate of 17% over the first seven years.
Required:
Calculate the present value of the company as on 1 January 2004. (10 marks
