Question Tag: Dividend Policy

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FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Leye Limited (LL) is a privately-owned toy manufacturer in Nigeria, operating internationally as both a supplier and a customer. While privately owned, LL’s revenue and asset base are comparable to some publicly listed companies. It has numerous shareholders but has no plans for public listing. Major shareholders have expressed an interest in buying out smaller investors.

LL has a strong history of profitability, which satisfies both directors and shareholders. They avoid strategies that increase risk significantly, such as acquisitions or overseas manufacturing setups, accepting a comparatively lower growth rate than competitors.

The company’s capital structure is composed of 70% equity and 30% debt (based on book values), with debt comprising secured and unsecured bonds carrying interest rates between 7% and 8.5%, maturing in 5 to 10 years. In a low-inflation and potentially declining interest rate environment, the company treasurer is exploring refinancing options.

LL’s primary financial objective is annual dividend growth, with a non-financial objective of treating all stakeholders with fairness and equality. The Board is currently reassessing these objectives. While the new Finance Director advocates for shareholder wealth maximization as the sole objective, other directors favor a balanced approach, including goals such as profit after tax, return on investment, and operational performance improvements.

Required:

a. Evaluate the appropriateness of LL’s current objectives and the Finance Director’s suggestion. Discuss the issues the Board should consider in setting new corporate objectives, concluding with a recommendation. (10 Marks)

b. Discuss factors the treasury department should consider when formulating financing or refinancing strategies in the given economic context. Explain how these factors might influence the determination of corporate objectives. (10 Marks)

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FM – Nov 2021 – L3 – Q3 – Financing Decisions and Capital Markets

Analyze financing alternatives for ZY Plc's new investment and assess rights issue and bond issue implications.

ZY Plc is an all-equity financed, publicly listed company in the food processing industry. The ZY family holds 40% of its ordinary shares, with the remainder owned by large financial institutions. ZY Plc currently has 10 million ₦1 ordinary shares in issue.

Recently, the company secured a long-term contract to supply food products to a large restaurant chain, necessitating an investment in new machinery costing ₦24 million. This machinery will be operational starting January 1, 2022, with payment due the same day, and sales commencing shortly afterward.

The company’s policy is to distribute all profits as dividends. If ZY Plc continues as an all-equity financed company, it will pay an annual dividend of ₦9 million indefinitely, starting December 31, 2022.

To finance the ₦24 million investment, ZY Plc is considering two options:

  1. A 2-for-5 rights issue, where the annual dividend would remain at ₦9 million. The cum-rights price per share is expected to be ₦6.60.
  2. Issuing 7.5% irredeemable bonds at par with interest payable annually in arrears. For this option, interest would be paid out of the ₦9 million otherwise allocated to dividends.

Under either financing method, the cost of equity is anticipated to remain at its current rate of 10% annually, with no tax implications.

Required:

a. Calculate the issue and ex-rights share prices of ZY Plc., assuming a 2-for-5 rights issue is used to finance the new project as of January 1, 2022. Ignore taxation. (4 Marks)

b. Calculate the value per ordinary share in ZY Plc on January 1, 2022, if 7.5% irredeemable bonds are issued to finance the new project. Assume that the cost of equity remains at 10% each year. Ignore taxation. (4 Marks)

c. Write a report to the directors of ZY Plc that includes: i. A comparison and contrast of the rights issue and bond issue methods for raising finance, referencing calculations from parts (a) and (b) and any assumptions. (6 Marks)
ii. A discussion on the appropriateness of the following alternative methods of issuing equity finance in the specific context of ZY Plc: – A placing – An offer for sale – A public offer for subscription (6 Marks)

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FM – Nov 2020 – L3 – Q6 – Dividend Policy

Evaluates the dividend payout and investment appraisal for Binko Industrial Services based on Modigliani and Miller's dividend policy, considering four potential projects.

Binko Industrial Services plc is an all-equity financed and Stock Exchange-listed company. Recently, there have been changes at the board level, prompting a shift from conservative profit distribution to seeking new investment opportunities. In the financial year just ended, the company reported a profit of ₦50 million, similar to previous years. The company’s cost of equity is 15% per annum, and four investment projects have been identified, each with the same risk class as existing projects.

Required:

a. Calculate the dividend Binko Industrial Services plc should pay to shareholders in the financial year just ended, based on Modigliani and Miller’s 1961 proposition, ignoring taxation. (5 Marks)

b. Prepare notes for the board meeting, explaining Modigliani and Miller’s dividend policy proposition and reasons why the company may decide against the calculated dividend in (a). Your comments should address Binko’s circumstances. Work to the nearest ₦1,000. (15 Marks)

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FM – May 2024 – L3 – SB – Q3 – Financial Planning and Forecasting

Evaluate financing options for Tope's Cellular Stores, including impact on profit, EPS, gearing, and shareholder perspective.

Tope operates a chain of cellular telephone stores in the country. An abbreviated profit or loss account and statement of financial position of the business for the year that has just ended is as follows:

Abbreviated Profit or Loss Account for the Year Ended 31 May 2023

Item Amount (₦’000)
Sales 6,450
Operating profit for the year 800
Interest payable (160)
Net profit before taxation 640
Tax (20%) (128)
Net profit after taxation 512
Dividends proposed (256)
Retained profit for the year 256

Abbreviated Statement of Financial Position as at 31 May 2023

Item Amount (₦’000)
Non-current assets at written down values 3,500
Current assets 1,800
Less: Current liabilities (1,100)
Net Current Assets 700
Total Assets 4,200
Less: Long-term liabilities (2,000)
Net Assets 2,200
Capital and Reserves
₦0.50 ordinary shares 600
Retained profit 1,600
Total Capital and Reserves 2,200

The company is expecting a surge in sales following advances in cellular telephone technology that should translate into additional operating profits of ₦180,000 per year for the foreseeable future. However, the company will need to invest ₦1,200,000 immediately in expanding the asset base of the business if it is to achieve these additional profits.

The business has approached a large supplier that already has an equity investment in the business to see whether it would be prepared to provide further funds for the business. The supplier has indicated it would be willing to provide the necessary funds by either:

(i) An issue of ₦0.50 ordinary shares at a premium of ₦1.50 per share; or
(ii) An issue of ₦1,200,000 10% debt at par.

The Board of Directors of Tope has already announced that it will maintain the same dividend payout ratio in future years as in the past, and that this policy will be unaffected by the form of finance raised.

Required:

a. For each of the financing options: i. Prepare a forecast profit or loss account for the forthcoming year. (5 Marks)
ii. Calculate the forecast earnings per share for the forthcoming year. (2 Marks)
iii. Calculate the projected level of gearing (D/(D+E)) at the end of the forthcoming year. (2 Marks)

b. Calculate the level of operating profit at which the earnings per share will be the same under each financing option. (3 Marks)

c. Evaluate each of the financing options from the viewpoint of an existing shareholder. (2 Marks)

d. Discuss the factors that will influence a company to finance through debt or equity, and whether to opt for long-term or short-term debt. (6 Marks)

(Total: 20 Marks)

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AT – Nov 2023 – L3 – SA – Q1 – Taxation of Specialized Businesses

Compute adjusted profits, tax liabilities, and analyze Industrial Development (Income Tax Relief) Act provisions for a pioneer company.

Paper World Nigeria Limited, Ibadan, a manufacturer of paper pulp, paper, and paperboard, was granted a pioneer certificate by the Federal Government on May 1, 2017, for an initial period of three years. Due to unfavorable business conditions and interference by the Ministry of Industry on dividend policy, loss treatment, and capital allowances, the company did not apply for an extension to the pioneer status.

The company’s financial statements for the first three years are as follows:

(i) Financial Data for the Years Ended

Year End April 30, 2018 April 30, 2019 April 30, 2020
N’000 N’000 N’000
Net loss (28,700) (25,500) (20,200)
After charging:
Salaries and wages 15,300 16,100 17,360
Transport and traveling 1,100 1,700 1,820
Depreciation 6,800 7,530 8,600
Rent and rates 1,200 1,400 1,500
Donations to social clubs 100 0 250
Allowance for doubtful debts:
Specific 1,400 1,200 1,500
General 1,850 1,750 1,800
General expenses 1,650 1,820 1,900

(ii) Qualifying Capital Expenditure (QCE) Certified by FIRS at Pioneer Period End

(iii) Additional QCE Acquired:

QCE Number of Items Amount (N’000) Date of Acquisition
Furniture and fittings 2 500 June 12, 2020
Motor vehicles 1 2,200 March 7, 2021

(iv) Operational Result (April 30, 2021)

Description N’000
Turnover 102,500
Dividend income (grossed up) 1,200
Other operating income 800
Total 104,500
Deductions:
Salaries and wages 39,600
Repairs and maintenance 3,500
Depreciation 15,300
Rents and rates 6,800
General and administrative expenses 9,970
Legal fees 2,500
Audit and accountancy fees 3,200
Allowance for doubtful debts 6,600
Bank charges 2,100
Net profits 14,930

Additional Information:

  • Dividend Income: From equity shares in a Nigerian listed company.
  • QCE Acquisitions:
    • Non-industrial building: N10,000
    • Industrial building: N25,600
    • Manufacturing industrial plants: N12,600
    • Furniture and fittings: N3,400
    • Motor vehicles: N4,000

(vi) Repairs and Maintenance Breakdown:

Category Amount (N’000)
Manufacturing plant repairs 1,500
Motor vehicle maintenance 800
Non-industrial building improvement 1,200

(vii) General and Administrative Expenses:

Category Amount (N’000)
Transport and traveling 3,750
Advertisement 4,920
Transfer to revenue reserve 1,300

(viii) Legal Fees Breakdown:

Category Amount (N’000)
Collection of trade debts 1,100
Fine for late tax filing 50
Legal expenses on new share issue 1,350

(ix) Doubtful Debts Allowance Breakdown:

Category Amount (N’000)
Bad debts written off 2,800
Specific provision 2,500
General provision 3,700
Bad debts recovered (2,400)

Required: As the company’s newly appointed Tax Consultant, prepare a report to the Managing Director stating the:

  1. Adjusted Profits for the Relevant Periods (13 Marks)
  2. Tax Liabilities Payable for the Relevant Assessment Year (11 Marks)
  3. Provisions of the Industrial Development (Income Tax Relief) Act 2007 (as amended) in respect of a Pioneer Company’s:
    • i. Dividend Payment (2 Marks)
    • ii. Losses Made During the Pioneer Period (2 Marks)
    • iii. Capital Allowances for Qualifying Capital Expenditure Acquired During the Pioneer Period (2 Marks)

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CR – Nov 2023 – L3 – SB – Q2 – Consolidated Financial Statements (IFRS 10)

Analyze the profitability, cash flow, and investor ratios of Mama-Kitchen PLC and discuss dividend policy and EPS limitations.

Mama-Kitchen PLC owns a number of subsidiaries that operate standard fast-food eateries in all the six geopolitical zones of the country. You are the financial analyst of your Bank (Pam-Pam Bank Nigeria Limited) which owns 10% of the issued share capital of Mama-Kitchen PLC.

You are provided with the following financial and background information on Mama-Kitchen PLC.

Mama-Kitchen PLC

Consolidated statement of profit or loss for the year ended September 30

2023 2022
Revenue 188,900 145,850
Cost of sales (141,700) (110,400)
Gross profit 47,200 35,450
Admin expenses (31,200) (22,400)
Profit from operations 16,000 13,050
Finance cost (2,050) (2,100)
Profit before taxation 13,950 10,950
Income tax expense (3,050) (2,300)
Profit for the year 10,900 8,650
Earnings per share – basic 26.8k 21.3k
Earnings per share – diluted 21.2k 19.2k

Mama-Kitchen PLC

Consolidated statement of cash flows for the year ended September 30

2023 2022
Cash flows from operating activities:
Profit before taxation 13,950 10,950
Finance cost 2,050 2,100
Depreciation and amortisation 15,300 11,050
Loss on disposal of PPE 150 50
(Increase)/decrease in inventories (200) 50
Increase/decrease in receivables (1,250) (100)
Increase in trade payables 2,250 650
Total 32,250 24,750
Interest paid (2,050) (2,200)
Tax paid (1,600) (1,300)
Net cash flows from operating activities 28,600 21,250
Cash flows from investing activities:
Purchase of PPE (29,850) (28,950)
Proceed from sale of PPE 100 150
Net cash used in investing activities (29,750) (28,800)
Cash flows from financing activities:
Proceeds from issues of shares 1,200 100
Borrowings 3,250 10,000
Net cash flow from financing activities 4,450 10,100
Net increase in cash and cash equivalents 3,300 2,550
Cash and cash equivalents at beginning 12,400 9,850
Cash and cash equivalents at year end 15,700 12,400

Details of revenue, fast food outlets profits, and new fast food outlets openings for the year ended September 30

2023 2022
Revenue per fast food outlets:
At September 30 1,770 1,715
Opened in the current financial year 1,290
Gross profit per outlet opened
At September 30 435 415
In the current financial year 345

Note:

  • 30 new outlets were opened during the year ended September 30, 2023, bringing the total to 115 fast food outlets.

Additional financial information

2023 2022
Gross profit margin 25% 24.3%
Debt equity ratio 35.2% 44.4%
Current ratio 0.56:1 0.48:1
Trade payables payment period 86 days 103 days
Return on capital employed 20% 19.1%
Cash return on capital employed 40.2% 36.3%
Earnings before Interest, tax, depreciation and amortisation (N‟m) 31,300 24,100
Non-current assets turnover 1.68 times 1.49 times
Share price (at September 30) 302k 290k

Background information

i. Mama-Kitchen PLC has a reputation of depreciating its assets more slowly than others in the industry.

ii. The strategy of the group is to fund new fast food outlets capital expenditure from existing operating cash flows without needing to raise new borrowings.

iii. Revenue growth in the industry is estimated at 4.1% per annum.

iv. It is the company’s policy to increase promotional and advertising spending on new outlets to encourage strong initial sales.

v. The board has accused the management of concentrating on new outlet openings to the detriment of existing outlets.

vi. One of your colleagues, a financial analyst, stated that the company has not been able to pay dividends because of the debit balance on its consolidated retained earnings.

Required:

a. Draft a report addressed to the Managing Director of Pam-Pam Bank Limited analyzing the profitability, cash flows, and investor ratios of Mama-Kitchen PLC. You should also identify and justify matters that you consider will require further investigations.
(13 Marks)

b. Explain the validity or otherwise of your colleague financial analyst’s statement that Mama-Kitchen PLC was unable to pay dividends because of the debit balance on consolidated retained earnings.
(4 Marks)

c. Explain the usefulness and limitations of diluted earnings per share information to investors.
(3 Marks)

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AFM – Nov 2016 – L3 – Q2a – Dividend policy in multinationals and transfer pricing

Advise on factors affecting dividend policy and calculate GGML’s dividend capacity and payout ratio for the next three years.

You are the newly employed Finance Director of Gala Gold Mining Ltd (GGML), a fast
growing Ghanaian mining company. The ordinary shares of GGML are listed on the Ghana
Stock Exchange. The company issued two million fresh shares in an Initial Public Offer (IPO)
to meet the minimum public shareholding requirement of the Exchange. In the prospectus
accompanying the IPO, the company proposed a stable earnings pay-out ratio of 20%.
It has been one year since the listing of GGML’s ordinary shares. At the first post-listing annual
general meeting, which was held last week, the directors recommended that the company
retains the entire profit earned in its first year as a public company to help finance profitable
mining opportunities in the Western part of Ghana. This 100% earnings retention proposal was
rejected by the shareholders, and the directors have promised to reconsider the issue and
recommend some dividends.
The directors would be meeting in the coming month to discuss the matter with the hope of
developing a sustainable dividend policy for the next three years. You are expected to make a
presentation on the company’s dividend capacity at the meeting.
You have gathered relevant extracts from the financial results of the past financial year (i.e.
financial year ending June 2015) and expected annual changes in the values over the next three
years (i.e. financial years ending June 2016, 2017 and 2018) presented in the Table below :

The company’s tax rate is expected to remain at 35%.
Required:
i) Advise the directors on THREE factors they should consider in developing an appropriate
dividend policy for GGML. (6 marks)
ii) Calculate the maximum dividends GGML can pay for the past financial year, and estimate
its dividend capacity for the next three years. Recommend an appropriate dividend payout ratio for the coming three financial years.

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AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions

Evaluate the financing options for Asana Ltd’s expansion, calculate the value of a right, dividend capacity, and debt-to-equity ratio under different methods.

Asana Ltd (Asana) is a manufacturing company based in Ghana. It is listed on Ghana’s stock exchange with a total market capitalization of GH¢400 million and 50 million shares outstanding. Its debt stock is made up of 10,000 18% bonds with a face value of GH¢100 each. Per the bond indenture, Asana is required to maintain a maximum debt-to-equity ratio of 80% and is prohibited from paying a dividend in any year unless its dividend capacity for that year is at least 45% of net income for that year. For the past three years, the company has not been able to pay dividends to its shareholders because it has not been able to meet the minimum dividend capacity requirement.

Presently, the company is planning an expansion project that could enhance its dividend capacity for the coming years. The expansion project is expected to increase profit before interest and tax by 15% above the recent figure of GH¢35 million. The directors are considering whether to use equity or debt finance to raise the GH¢50 million required by the expansion project. The amount required for the business expansion will be invested in additional property and equipment. Details of the two financing methods under consideration follow:

Method 1: Equity Finance
If equity finance is used, Asana will offer 1 new share for every 4 existing shares in a rights offer at a discount of 10% off the current market price.

Method 2: Debt Finance
If debt finance is used, Asana will raise the required GH¢50 million through a syndicated loan arrangement. The interest rate on this syndicated loan is expected to be 20%. It is assumed that the entire principal will be drawn immediately and paid back in a lump sum in 5 years’ time.

Additional information:

  1. Presently, the book value of equity is GH¢200 million, while the debt level is GH¢100 million.
  2. The recent profit before interest and tax is reported after charging depreciation of GH¢10 million and profit on disposal of non-current assets of GH¢2 million. The aggregate cost of the non-current assets sold is GH¢10 million, and their aggregate accumulated depreciation is GH¢8 million.
  3. In addition to the business expansion expenditure, GH¢2 million will be invested to maintain existing productive capacity in the coming year. This will be financed from retained earnings.
  4. Additional investment in net working capital will be 20% of the current net working capital balance of GH¢100 million.
  5. Asana pays corporate income tax at 22%.

Required:

i) Supposing equity finance is used, compute the value of a right.
(2 marks)

ii) Forecast the dividend capacity of Asana under both financing methods after the business expansion. Conclude whether Asana would be able to pay dividends to its shareholders in the coming year.
(5 marks)

iii) Compute the revised debt-to-equity ratio of Asana under both financing methods after the business expansion.
(3 marks)

iv) Use the results of the calculations above to evaluate whether equity or debt finance should be used for the planned business expansion.
(2 marks)

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AFM – Nov 2016 – L3 – Q1a – The role and responsibility of senior financial executive/advisor | Financial strategy formulation

Discuss the interrelation between investment, financing, and dividend policies and their effect on firm value.

When determining the financial objectives of a company, it is necessary to take three types of policy decisions into account: investment policy, financing policy, and dividend policy.

Required:
Discuss the nature of these three types of decisions, commenting on how they are interrelated and how they might affect the value of the firm (i.e., the present value of projected cash flows).

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AFM – May 2018 – L3 – Q5a – Dividend policy in multinationals and transfer pricing

Discussing why share prices plunge when multinational companies suspend paying dividends and outlining theories of dividend policy.

Recently, some multinational companies have suspended paying dividends. If, as some say, dividends are irrelevant, why have share prices plunged in most of these companies?

Required:
In your answer, outline both dividend policy theory and relevant examples.

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FM – Nov 2021 – L3 – Q4 – Corporate Governance and Financial Strategy

Assess LL's corporate objectives, the finance director's view, and treasury strategies within a low-interest economic environment.

Leye Limited (LL) is a privately-owned toy manufacturer in Nigeria, operating internationally as both a supplier and a customer. While privately owned, LL’s revenue and asset base are comparable to some publicly listed companies. It has numerous shareholders but has no plans for public listing. Major shareholders have expressed an interest in buying out smaller investors.

LL has a strong history of profitability, which satisfies both directors and shareholders. They avoid strategies that increase risk significantly, such as acquisitions or overseas manufacturing setups, accepting a comparatively lower growth rate than competitors.

The company’s capital structure is composed of 70% equity and 30% debt (based on book values), with debt comprising secured and unsecured bonds carrying interest rates between 7% and 8.5%, maturing in 5 to 10 years. In a low-inflation and potentially declining interest rate environment, the company treasurer is exploring refinancing options.

LL’s primary financial objective is annual dividend growth, with a non-financial objective of treating all stakeholders with fairness and equality. The Board is currently reassessing these objectives. While the new Finance Director advocates for shareholder wealth maximization as the sole objective, other directors favor a balanced approach, including goals such as profit after tax, return on investment, and operational performance improvements.

Required:

a. Evaluate the appropriateness of LL’s current objectives and the Finance Director’s suggestion. Discuss the issues the Board should consider in setting new corporate objectives, concluding with a recommendation. (10 Marks)

b. Discuss factors the treasury department should consider when formulating financing or refinancing strategies in the given economic context. Explain how these factors might influence the determination of corporate objectives. (10 Marks)

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FM – Nov 2021 – L3 – Q3 – Financing Decisions and Capital Markets

Analyze financing alternatives for ZY Plc's new investment and assess rights issue and bond issue implications.

ZY Plc is an all-equity financed, publicly listed company in the food processing industry. The ZY family holds 40% of its ordinary shares, with the remainder owned by large financial institutions. ZY Plc currently has 10 million ₦1 ordinary shares in issue.

Recently, the company secured a long-term contract to supply food products to a large restaurant chain, necessitating an investment in new machinery costing ₦24 million. This machinery will be operational starting January 1, 2022, with payment due the same day, and sales commencing shortly afterward.

The company’s policy is to distribute all profits as dividends. If ZY Plc continues as an all-equity financed company, it will pay an annual dividend of ₦9 million indefinitely, starting December 31, 2022.

To finance the ₦24 million investment, ZY Plc is considering two options:

  1. A 2-for-5 rights issue, where the annual dividend would remain at ₦9 million. The cum-rights price per share is expected to be ₦6.60.
  2. Issuing 7.5% irredeemable bonds at par with interest payable annually in arrears. For this option, interest would be paid out of the ₦9 million otherwise allocated to dividends.

Under either financing method, the cost of equity is anticipated to remain at its current rate of 10% annually, with no tax implications.

Required:

a. Calculate the issue and ex-rights share prices of ZY Plc., assuming a 2-for-5 rights issue is used to finance the new project as of January 1, 2022. Ignore taxation. (4 Marks)

b. Calculate the value per ordinary share in ZY Plc on January 1, 2022, if 7.5% irredeemable bonds are issued to finance the new project. Assume that the cost of equity remains at 10% each year. Ignore taxation. (4 Marks)

c. Write a report to the directors of ZY Plc that includes: i. A comparison and contrast of the rights issue and bond issue methods for raising finance, referencing calculations from parts (a) and (b) and any assumptions. (6 Marks)
ii. A discussion on the appropriateness of the following alternative methods of issuing equity finance in the specific context of ZY Plc: – A placing – An offer for sale – A public offer for subscription (6 Marks)

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FM – Nov 2020 – L3 – Q6 – Dividend Policy

Evaluates the dividend payout and investment appraisal for Binko Industrial Services based on Modigliani and Miller's dividend policy, considering four potential projects.

Binko Industrial Services plc is an all-equity financed and Stock Exchange-listed company. Recently, there have been changes at the board level, prompting a shift from conservative profit distribution to seeking new investment opportunities. In the financial year just ended, the company reported a profit of ₦50 million, similar to previous years. The company’s cost of equity is 15% per annum, and four investment projects have been identified, each with the same risk class as existing projects.

Required:

a. Calculate the dividend Binko Industrial Services plc should pay to shareholders in the financial year just ended, based on Modigliani and Miller’s 1961 proposition, ignoring taxation. (5 Marks)

b. Prepare notes for the board meeting, explaining Modigliani and Miller’s dividend policy proposition and reasons why the company may decide against the calculated dividend in (a). Your comments should address Binko’s circumstances. Work to the nearest ₦1,000. (15 Marks)

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FM – May 2024 – L3 – SB – Q3 – Financial Planning and Forecasting

Evaluate financing options for Tope's Cellular Stores, including impact on profit, EPS, gearing, and shareholder perspective.

Tope operates a chain of cellular telephone stores in the country. An abbreviated profit or loss account and statement of financial position of the business for the year that has just ended is as follows:

Abbreviated Profit or Loss Account for the Year Ended 31 May 2023

Item Amount (₦’000)
Sales 6,450
Operating profit for the year 800
Interest payable (160)
Net profit before taxation 640
Tax (20%) (128)
Net profit after taxation 512
Dividends proposed (256)
Retained profit for the year 256

Abbreviated Statement of Financial Position as at 31 May 2023

Item Amount (₦’000)
Non-current assets at written down values 3,500
Current assets 1,800
Less: Current liabilities (1,100)
Net Current Assets 700
Total Assets 4,200
Less: Long-term liabilities (2,000)
Net Assets 2,200
Capital and Reserves
₦0.50 ordinary shares 600
Retained profit 1,600
Total Capital and Reserves 2,200

The company is expecting a surge in sales following advances in cellular telephone technology that should translate into additional operating profits of ₦180,000 per year for the foreseeable future. However, the company will need to invest ₦1,200,000 immediately in expanding the asset base of the business if it is to achieve these additional profits.

The business has approached a large supplier that already has an equity investment in the business to see whether it would be prepared to provide further funds for the business. The supplier has indicated it would be willing to provide the necessary funds by either:

(i) An issue of ₦0.50 ordinary shares at a premium of ₦1.50 per share; or
(ii) An issue of ₦1,200,000 10% debt at par.

The Board of Directors of Tope has already announced that it will maintain the same dividend payout ratio in future years as in the past, and that this policy will be unaffected by the form of finance raised.

Required:

a. For each of the financing options: i. Prepare a forecast profit or loss account for the forthcoming year. (5 Marks)
ii. Calculate the forecast earnings per share for the forthcoming year. (2 Marks)
iii. Calculate the projected level of gearing (D/(D+E)) at the end of the forthcoming year. (2 Marks)

b. Calculate the level of operating profit at which the earnings per share will be the same under each financing option. (3 Marks)

c. Evaluate each of the financing options from the viewpoint of an existing shareholder. (2 Marks)

d. Discuss the factors that will influence a company to finance through debt or equity, and whether to opt for long-term or short-term debt. (6 Marks)

(Total: 20 Marks)

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AT – Nov 2023 – L3 – SA – Q1 – Taxation of Specialized Businesses

Compute adjusted profits, tax liabilities, and analyze Industrial Development (Income Tax Relief) Act provisions for a pioneer company.

Paper World Nigeria Limited, Ibadan, a manufacturer of paper pulp, paper, and paperboard, was granted a pioneer certificate by the Federal Government on May 1, 2017, for an initial period of three years. Due to unfavorable business conditions and interference by the Ministry of Industry on dividend policy, loss treatment, and capital allowances, the company did not apply for an extension to the pioneer status.

The company’s financial statements for the first three years are as follows:

(i) Financial Data for the Years Ended

Year End April 30, 2018 April 30, 2019 April 30, 2020
N’000 N’000 N’000
Net loss (28,700) (25,500) (20,200)
After charging:
Salaries and wages 15,300 16,100 17,360
Transport and traveling 1,100 1,700 1,820
Depreciation 6,800 7,530 8,600
Rent and rates 1,200 1,400 1,500
Donations to social clubs 100 0 250
Allowance for doubtful debts:
Specific 1,400 1,200 1,500
General 1,850 1,750 1,800
General expenses 1,650 1,820 1,900

(ii) Qualifying Capital Expenditure (QCE) Certified by FIRS at Pioneer Period End

(iii) Additional QCE Acquired:

QCE Number of Items Amount (N’000) Date of Acquisition
Furniture and fittings 2 500 June 12, 2020
Motor vehicles 1 2,200 March 7, 2021

(iv) Operational Result (April 30, 2021)

Description N’000
Turnover 102,500
Dividend income (grossed up) 1,200
Other operating income 800
Total 104,500
Deductions:
Salaries and wages 39,600
Repairs and maintenance 3,500
Depreciation 15,300
Rents and rates 6,800
General and administrative expenses 9,970
Legal fees 2,500
Audit and accountancy fees 3,200
Allowance for doubtful debts 6,600
Bank charges 2,100
Net profits 14,930

Additional Information:

  • Dividend Income: From equity shares in a Nigerian listed company.
  • QCE Acquisitions:
    • Non-industrial building: N10,000
    • Industrial building: N25,600
    • Manufacturing industrial plants: N12,600
    • Furniture and fittings: N3,400
    • Motor vehicles: N4,000

(vi) Repairs and Maintenance Breakdown:

Category Amount (N’000)
Manufacturing plant repairs 1,500
Motor vehicle maintenance 800
Non-industrial building improvement 1,200

(vii) General and Administrative Expenses:

Category Amount (N’000)
Transport and traveling 3,750
Advertisement 4,920
Transfer to revenue reserve 1,300

(viii) Legal Fees Breakdown:

Category Amount (N’000)
Collection of trade debts 1,100
Fine for late tax filing 50
Legal expenses on new share issue 1,350

(ix) Doubtful Debts Allowance Breakdown:

Category Amount (N’000)
Bad debts written off 2,800
Specific provision 2,500
General provision 3,700
Bad debts recovered (2,400)

Required: As the company’s newly appointed Tax Consultant, prepare a report to the Managing Director stating the:

  1. Adjusted Profits for the Relevant Periods (13 Marks)
  2. Tax Liabilities Payable for the Relevant Assessment Year (11 Marks)
  3. Provisions of the Industrial Development (Income Tax Relief) Act 2007 (as amended) in respect of a Pioneer Company’s:
    • i. Dividend Payment (2 Marks)
    • ii. Losses Made During the Pioneer Period (2 Marks)
    • iii. Capital Allowances for Qualifying Capital Expenditure Acquired During the Pioneer Period (2 Marks)

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CR – Nov 2023 – L3 – SB – Q2 – Consolidated Financial Statements (IFRS 10)

Analyze the profitability, cash flow, and investor ratios of Mama-Kitchen PLC and discuss dividend policy and EPS limitations.

Mama-Kitchen PLC owns a number of subsidiaries that operate standard fast-food eateries in all the six geopolitical zones of the country. You are the financial analyst of your Bank (Pam-Pam Bank Nigeria Limited) which owns 10% of the issued share capital of Mama-Kitchen PLC.

You are provided with the following financial and background information on Mama-Kitchen PLC.

Mama-Kitchen PLC

Consolidated statement of profit or loss for the year ended September 30

2023 2022
Revenue 188,900 145,850
Cost of sales (141,700) (110,400)
Gross profit 47,200 35,450
Admin expenses (31,200) (22,400)
Profit from operations 16,000 13,050
Finance cost (2,050) (2,100)
Profit before taxation 13,950 10,950
Income tax expense (3,050) (2,300)
Profit for the year 10,900 8,650
Earnings per share – basic 26.8k 21.3k
Earnings per share – diluted 21.2k 19.2k

Mama-Kitchen PLC

Consolidated statement of cash flows for the year ended September 30

2023 2022
Cash flows from operating activities:
Profit before taxation 13,950 10,950
Finance cost 2,050 2,100
Depreciation and amortisation 15,300 11,050
Loss on disposal of PPE 150 50
(Increase)/decrease in inventories (200) 50
Increase/decrease in receivables (1,250) (100)
Increase in trade payables 2,250 650
Total 32,250 24,750
Interest paid (2,050) (2,200)
Tax paid (1,600) (1,300)
Net cash flows from operating activities 28,600 21,250
Cash flows from investing activities:
Purchase of PPE (29,850) (28,950)
Proceed from sale of PPE 100 150
Net cash used in investing activities (29,750) (28,800)
Cash flows from financing activities:
Proceeds from issues of shares 1,200 100
Borrowings 3,250 10,000
Net cash flow from financing activities 4,450 10,100
Net increase in cash and cash equivalents 3,300 2,550
Cash and cash equivalents at beginning 12,400 9,850
Cash and cash equivalents at year end 15,700 12,400

Details of revenue, fast food outlets profits, and new fast food outlets openings for the year ended September 30

2023 2022
Revenue per fast food outlets:
At September 30 1,770 1,715
Opened in the current financial year 1,290
Gross profit per outlet opened
At September 30 435 415
In the current financial year 345

Note:

  • 30 new outlets were opened during the year ended September 30, 2023, bringing the total to 115 fast food outlets.

Additional financial information

2023 2022
Gross profit margin 25% 24.3%
Debt equity ratio 35.2% 44.4%
Current ratio 0.56:1 0.48:1
Trade payables payment period 86 days 103 days
Return on capital employed 20% 19.1%
Cash return on capital employed 40.2% 36.3%
Earnings before Interest, tax, depreciation and amortisation (N‟m) 31,300 24,100
Non-current assets turnover 1.68 times 1.49 times
Share price (at September 30) 302k 290k

Background information

i. Mama-Kitchen PLC has a reputation of depreciating its assets more slowly than others in the industry.

ii. The strategy of the group is to fund new fast food outlets capital expenditure from existing operating cash flows without needing to raise new borrowings.

iii. Revenue growth in the industry is estimated at 4.1% per annum.

iv. It is the company’s policy to increase promotional and advertising spending on new outlets to encourage strong initial sales.

v. The board has accused the management of concentrating on new outlet openings to the detriment of existing outlets.

vi. One of your colleagues, a financial analyst, stated that the company has not been able to pay dividends because of the debit balance on its consolidated retained earnings.

Required:

a. Draft a report addressed to the Managing Director of Pam-Pam Bank Limited analyzing the profitability, cash flows, and investor ratios of Mama-Kitchen PLC. You should also identify and justify matters that you consider will require further investigations.
(13 Marks)

b. Explain the validity or otherwise of your colleague financial analyst’s statement that Mama-Kitchen PLC was unable to pay dividends because of the debit balance on consolidated retained earnings.
(4 Marks)

c. Explain the usefulness and limitations of diluted earnings per share information to investors.
(3 Marks)

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AFM – Nov 2016 – L3 – Q2a – Dividend policy in multinationals and transfer pricing

Advise on factors affecting dividend policy and calculate GGML’s dividend capacity and payout ratio for the next three years.

You are the newly employed Finance Director of Gala Gold Mining Ltd (GGML), a fast
growing Ghanaian mining company. The ordinary shares of GGML are listed on the Ghana
Stock Exchange. The company issued two million fresh shares in an Initial Public Offer (IPO)
to meet the minimum public shareholding requirement of the Exchange. In the prospectus
accompanying the IPO, the company proposed a stable earnings pay-out ratio of 20%.
It has been one year since the listing of GGML’s ordinary shares. At the first post-listing annual
general meeting, which was held last week, the directors recommended that the company
retains the entire profit earned in its first year as a public company to help finance profitable
mining opportunities in the Western part of Ghana. This 100% earnings retention proposal was
rejected by the shareholders, and the directors have promised to reconsider the issue and
recommend some dividends.
The directors would be meeting in the coming month to discuss the matter with the hope of
developing a sustainable dividend policy for the next three years. You are expected to make a
presentation on the company’s dividend capacity at the meeting.
You have gathered relevant extracts from the financial results of the past financial year (i.e.
financial year ending June 2015) and expected annual changes in the values over the next three
years (i.e. financial years ending June 2016, 2017 and 2018) presented in the Table below :

The company’s tax rate is expected to remain at 35%.
Required:
i) Advise the directors on THREE factors they should consider in developing an appropriate
dividend policy for GGML. (6 marks)
ii) Calculate the maximum dividends GGML can pay for the past financial year, and estimate
its dividend capacity for the next three years. Recommend an appropriate dividend payout ratio for the coming three financial years.

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AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions

Evaluate the financing options for Asana Ltd’s expansion, calculate the value of a right, dividend capacity, and debt-to-equity ratio under different methods.

Asana Ltd (Asana) is a manufacturing company based in Ghana. It is listed on Ghana’s stock exchange with a total market capitalization of GH¢400 million and 50 million shares outstanding. Its debt stock is made up of 10,000 18% bonds with a face value of GH¢100 each. Per the bond indenture, Asana is required to maintain a maximum debt-to-equity ratio of 80% and is prohibited from paying a dividend in any year unless its dividend capacity for that year is at least 45% of net income for that year. For the past three years, the company has not been able to pay dividends to its shareholders because it has not been able to meet the minimum dividend capacity requirement.

Presently, the company is planning an expansion project that could enhance its dividend capacity for the coming years. The expansion project is expected to increase profit before interest and tax by 15% above the recent figure of GH¢35 million. The directors are considering whether to use equity or debt finance to raise the GH¢50 million required by the expansion project. The amount required for the business expansion will be invested in additional property and equipment. Details of the two financing methods under consideration follow:

Method 1: Equity Finance
If equity finance is used, Asana will offer 1 new share for every 4 existing shares in a rights offer at a discount of 10% off the current market price.

Method 2: Debt Finance
If debt finance is used, Asana will raise the required GH¢50 million through a syndicated loan arrangement. The interest rate on this syndicated loan is expected to be 20%. It is assumed that the entire principal will be drawn immediately and paid back in a lump sum in 5 years’ time.

Additional information:

  1. Presently, the book value of equity is GH¢200 million, while the debt level is GH¢100 million.
  2. The recent profit before interest and tax is reported after charging depreciation of GH¢10 million and profit on disposal of non-current assets of GH¢2 million. The aggregate cost of the non-current assets sold is GH¢10 million, and their aggregate accumulated depreciation is GH¢8 million.
  3. In addition to the business expansion expenditure, GH¢2 million will be invested to maintain existing productive capacity in the coming year. This will be financed from retained earnings.
  4. Additional investment in net working capital will be 20% of the current net working capital balance of GH¢100 million.
  5. Asana pays corporate income tax at 22%.

Required:

i) Supposing equity finance is used, compute the value of a right.
(2 marks)

ii) Forecast the dividend capacity of Asana under both financing methods after the business expansion. Conclude whether Asana would be able to pay dividends to its shareholders in the coming year.
(5 marks)

iii) Compute the revised debt-to-equity ratio of Asana under both financing methods after the business expansion.
(3 marks)

iv) Use the results of the calculations above to evaluate whether equity or debt finance should be used for the planned business expansion.
(2 marks)

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AFM – Nov 2016 – L3 – Q1a – The role and responsibility of senior financial executive/advisor | Financial strategy formulation

Discuss the interrelation between investment, financing, and dividend policies and their effect on firm value.

When determining the financial objectives of a company, it is necessary to take three types of policy decisions into account: investment policy, financing policy, and dividend policy.

Required:
Discuss the nature of these three types of decisions, commenting on how they are interrelated and how they might affect the value of the firm (i.e., the present value of projected cash flows).

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AFM – May 2018 – L3 – Q5a – Dividend policy in multinationals and transfer pricing

Discussing why share prices plunge when multinational companies suspend paying dividends and outlining theories of dividend policy.

Recently, some multinational companies have suspended paying dividends. If, as some say, dividends are irrelevant, why have share prices plunged in most of these companies?

Required:
In your answer, outline both dividend policy theory and relevant examples.

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