Roads Ltd is a construction company that builds roads and related civil projects. The company
recently faced increased calls from investors to pay dividends due to the perceived lack of
new profitable projects in a low growth economy. The company has, in spite of weak business
sentiment, maintained a stable profit margin. At a recent meeting, the board resolved to adopt
a residual approach to dividend payments. You have been tasked with recommending the
dividend that should be paid at the end of the 2022 financial year.
The company expects to have earnings available to common shareholders of R 60 million and
it will have five million shares in issue at the end of the financial year. Its project schedule for
the next financial year is as follows:
Project A B C D
IRR 18% 15% 14% 11%
Cost (Rm) 20 15 21 16
The company has a WACC of 8% and a target debt ratio of 50%.
Determine the dividend per share that the company can pay if a strict residual policy is
followed. Choose the nearest, most correct option below.
a. R3.12
b. R4.80
c. R5.34
, d. R6.24
Accept all project (IIR > WACC)
Total investment = 20 + 15 + 21 + 1 6 = R72m
Equity needs = 0.5 *R72m = R36m
Dividends = R60 – R36 = R24
DPS = R24m/5m
= R4.80
QUESTION 2
Conifers Ltd, a tree relocation company, follows a stable plus special dividend policy. The
company recently (2022) had earnings available to common shareholders of R500m on sales
of R4b and has 250m shares outstanding.
The company maintains a stable pay-out ratio of 10% and issues special dividends whenever
its net profit margin exceeds 10%. Special dividends amount to all profits exceeding 50% of
the amount, after the stable dividend had been deducted.
Determine the total dividend that Conifers Ltd will pay per share in 2022 and choose the
nearest option below.