QUESTION $3$

$(10$ marks$)$

Investec Ltd is a listed company that has $300,000$ shares in issue. The company plans

to raise additional finance to expand its existing business.

The company has a debt$/$equity ratio of $0\mathrm{.}25.$ The company's current share price is

$$3\mathrm{.}90.$ It pays a percentage dividend of $10\%$ of earnings.

Investec Ltd$\text{'}$s Financial Manager has forecast the following earnings for the next five

$(5)$ years.

The company's earnings for the last five $(5)$ years have been as follows:

Investec Ltd$\text{'}$s pre$-$tax cost of debt is $12\%$ and pays annual corporation tax of $30\%.$

Investec Ltd expects its earnings to grow by $8\%$ after the fifth year.

Required:

a$)$ Calculate the value of the company based on the present value of expected

earnings after

taxation.

marks$)$

b$)$ Discuss the arguments for and against Investec Ltd$\text{'}$s dividend

policy.