MAC 3761 TEST 4 OF THE 2025 ACADEMIC YEAR:
QUESTION 1
(a) 111
(i) Based on the extract from Truwollies provided below, determine and
evaluate the current dividend policy at the end of 2025. (Calculations 1 mark
and discussions 1 mark).
FEEDBACK:
Payout Ratio Analysis:
2025 2024
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 53 260 46 313
Payout Ratio = × 100 = 96 836 × 100 = 84 205 × 100
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
= 55% = 55%
Conclusion:
The dividend payout ratio has consistently been set at 55% for both 2024 and
2025. This steady, proportional approach offers shareholders a degree of
predictability; however, it could restrict the amount of internally generated funds
(retained earnings) available for significant capital investments.
(ii) In light of the Investment programme under consideration by the board of
Truwollies, discuss if the current dividend policy identified in part (a)(i)
above, remains appropriate or whether a residual dividend policy should be
adopted by Truwollies. No calculation is required for this question. (6 marks
discussions).
FEEDBACK:
• Under the current payout ratio of 55 percent, internal resources may fall
short, leading to a potential increase in debt or equity issuance and straying
from the intended 50/50 capital structure.
• With a residual dividend policy, profits are primarily allocated to fund
necessary equity for sanctioned investments; only surplus amounts are
distributed as dividends.
• This method connects dividend distributions with real investment demands
and lessens dependence on external funding sources.
• It helps in maintaining the desired capital structure by decreasing costly
equity issuances and safeguarding credit capacity.
• Nonetheless, relying exclusively on residual dividends can lead to
unpredictability, which could result in shareholder discontent and
fluctuations in share prices.
• To reconcile funding needs with investor expectations, Truwollies might
consider adopting the residual dividend policy instead of its current
dividend policy. Effectively, it will assist in shaping market perceptions
positively and sustaining investor trust.
,
QUESTION 1
(a) 111
(i) Based on the extract from Truwollies provided below, determine and
evaluate the current dividend policy at the end of 2025. (Calculations 1 mark
and discussions 1 mark).
FEEDBACK:
Payout Ratio Analysis:
2025 2024
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 53 260 46 313
Payout Ratio = × 100 = 96 836 × 100 = 84 205 × 100
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
= 55% = 55%
Conclusion:
The dividend payout ratio has consistently been set at 55% for both 2024 and
2025. This steady, proportional approach offers shareholders a degree of
predictability; however, it could restrict the amount of internally generated funds
(retained earnings) available for significant capital investments.
(ii) In light of the Investment programme under consideration by the board of
Truwollies, discuss if the current dividend policy identified in part (a)(i)
above, remains appropriate or whether a residual dividend policy should be
adopted by Truwollies. No calculation is required for this question. (6 marks
discussions).
FEEDBACK:
• Under the current payout ratio of 55 percent, internal resources may fall
short, leading to a potential increase in debt or equity issuance and straying
from the intended 50/50 capital structure.
• With a residual dividend policy, profits are primarily allocated to fund
necessary equity for sanctioned investments; only surplus amounts are
distributed as dividends.
• This method connects dividend distributions with real investment demands
and lessens dependence on external funding sources.
• It helps in maintaining the desired capital structure by decreasing costly
equity issuances and safeguarding credit capacity.
• Nonetheless, relying exclusively on residual dividends can lead to
unpredictability, which could result in shareholder discontent and
fluctuations in share prices.
• To reconcile funding needs with investor expectations, Truwollies might
consider adopting the residual dividend policy instead of its current
dividend policy. Effectively, it will assist in shaping market perceptions
positively and sustaining investor trust.
,
