Home » The board of directors of Masii Limited is divided on whether to adopt a high or low dividend payout policy.

The board of directors of Masii Limited is divided on whether to adopt a high or low dividend payout policy.

The board of directors of Masii Limited is divided on whether to adopt a high or low dividend payout policy.  One of the directors has quoted the ‘dividend discount model’ as proof that the ‘higher the dividends, the higher the share price.’

Required:

Highlight two arguments for and against a high dividend payout policy.  (4 marks)

Using a constant growth dividend discount model, evaluate the director’s statement.                                                                      (6 marks)

Leo Plastics Limited is an all equity financed company.  It had three strategic business divisions as on 1 January 2004:

The Polythene division

It has a capital of Sh. 8 million and is expected to produce returns of 11% on capital for the next five years.  Thereafter, it will produce returns equal to the required rate of return of 14% for its risk level.

The Paper division

It has a capital of Sh. 12 million and a planning horizon of 10 years.  During this planning horizon, it will produce a return of 12% on capital compared with a risk adjusted required rate of return of 15%.

The Container division

It has a capital of Sh. 12 million and a planning horizon of 7 years.  The required rate of return on capital is 16% compared with the anticipated actual rate of 17% over the first seven years.

Required:

Calculate the present value of the company as on 1 January 2004. (10 marks

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