Question

Question 2.1 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 2018 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 60%. Required: Determine the amount of earnings available to common shareholders that could be paid out as a divided according to the residual policy. Create a brief report for the board showing the projects that would be undertaken and also determine the dividend that could be paid.

Required:

Determine the amount of earnings available to common shareholders that could be paid out as a divided according to the residual policy. Create a brief report for the board showing the projects that would be undertaken and also determine the dividend that could be paid.

Answer 1

Project	A	B	C	D	A+B+C+D
IRR	18%	15%	14%	11%
Cost (Rm)	20	15	21	16	72
WACC	8%	8%	8%	8%
Diff(IRR-WACC)	10%	7%	6%	3%
Selection ranking based on higher difference in above line	1	2	3	4
Debt(60%*Total cost)	12	9	12.6	9.6	43.2
Equity (40%*Total cost)	8	6	8.4	6.4	28.8

so, based on comparison of IRR of projects with WACC, projects A,B,C & D can be chosen, in that order

the total investment or CAPEX works out to R 72 m , out of which, R 43.2 mln. Are to be raised thro' debt & balance R 28.8t m thro' equity

leaving out 60-28.8= R 31.2 m as residual amount that can be distributed as dividends to the 5 million shares

working out to R 31.2 m/ 5 m shares, ie.R 6.24 /share