Redley plc, which manufactures building products, experienced a sharp increase in operating profit (i.e. profits before interest
Question:
In the past, Redley has followed a conservative financial policy, with restricted dividend payouts and relatively low borrowing levels. It now faces the issue of how to utilise an unexpectedly sizeable cash surplus. Directors have made two main suggestions. One is to redeem the £10 million of the secured loan stock issued to finance investment several years previously, the other is to increase the dividend payment by the same amount.
Redley's present capital structure is shown below:
£m
Issued share capital (par value 50p)......................90
Reserves.....................................................110
Creditors due after more than one year:
9% secured loan stock 2004...............................30
Further information
(i) Redley has no overdraft.
(ii) Redley pays corporate tax at a rate of 33%.
(iii) The last dividend paid by Redley was 1.45 pence per share.
(iv) Sector averages currently stand as follows:
Dividend cover............................................2.5 times
Gearing (long-term debt/equity) ............................48%
Interest cover..............................................5.9 times
(v) Redley's P:E ratio is 17:1.
Required
(a) Calculate (i) the dividend cover and (ii) the dividend yield for both 2012-13 and for the reporting year 2013-14, if the dividend is raised as proposed.
(b) You have been hired to work as a financial strategist for Redley, reporting to the Finance Director. Using the information provided, write a report to your superior, which identifies and discusses the issues to be addressed when assessing the relative merits of the two proposals for reducing the cash surplus.
Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Related Book For
Corporate Finance and Investment decisions and strategies
ISBN: 978-1292064062
8th edition
Authors: Richard Pike, Bill Neale, Philip Linsley
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