TEST $2-$ BAFB$3013$ Financial Management $($CLO$2)$

There are TWO $(2)$ questions in this section. Answer ALL questions.

Question $1$

ABX Sdn Bhd$.$ expects EBIT of RM$2,000,000$ for the coming year. The firm's capital structure

consists of $40\%$ debt and $60\%$ equity, and its marginal tax rate is $27\%.$ The cost of equity is $14\%$

and the company pays a $10\%$ rate on its RM$5,000,000$ long$-$term debt. One million shares of

common stock are outstanding.

In the next capital budget cycle, the firm expects to fund one large positive NPV project costing

RM$1,200,000$ and it will fund this project in accordance with its target capital structure. If the firm

follows a residual dividend policy and has no other projects, what is its expected dividend payout

ratio?

$(10$ Marks$)$

Question $2$

Berjaya Berhad had total earnings last year of RM$5,000,000$ but expect total earnings to drop to

RM$4,750,000$ this year because of a slump in the housing industry. There are currently $1,000,000$

shares of common stock outstanding. The company has RM$4,000,000$ worth of investment to

undertake this year. The company finances $40\%$ of its investments with debt and $60\%$ with equity

capital. The company paid RM$3\mathrm{.}00$ per share dividend last year.

a$)$ If the company follows a pure residual dividend policy, how large the dividend per share will

each shareholder receive this year?

$(5$ Marks$)$

b$)$ If the company maintains a constant dividend payout ratio each year, how large the dividend

per share will each shareholder receive this year?

$(4$ Marks$)$

c$)$ If the company follows a constant dollar dividend policy, how large the dividend per share will

each shareholder receive this year?

$($Total: $10$ Marks$)$