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Notle Ltd is a growth oriented company, 75% of which is owned by its directors and 25% by an outside financier. The company was formed four years ago by the directors, but after two years the company could not raise further loans and the directors had no further funds to invest. There were, however, a number of profitable investments available. At that time the financier agreed to invest in the company, but he indicated that he would not like the debt ratio to exceed 40% because he believed that the company was exposed to a high degree of business risk and should therefore take a conservative financial position.
Investment opportunities for the coming year are:
Project Cost ($) IRR
A 180 16%
B 420 14%
C 240 13%
D 210 12%
E 270 10%
Profits for the last year amounted to $900 after tax, and the cost of capital is 11%.
REQUIRED:
1 Apply the residual dividend policy and determine the amount if any, that should be distributed as dividend.
2 What do you think the financier's attitude would be to dividends?
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