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.’
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.
Calculate the present value of the company as on 1 January 2004. (10 marks