Question

There are two companies Rama Ltd. and Suzy Ltd with total investment of Rs.30 lakh each. The capital structure of Rama Ltd. Consist Rs.10 lakh of equity share capital of Rs. 10 each and debt fund of Rs.20 lakh, while in suzy Ltd. It consist only equity share capital. EBIT (earning before interest and tax) is 7.5 lakh, the interest rate on debt is @10% and the tax rate is 30%. which company will generate higher yield (dividend) in order to maximize the returns to the equity shareholders.

OR

 Anu Ltd. Earned consolidated profits of Rs.500 crores. The company wants to decide how to effectively allocate profits in order to develop balance between expectations of shareholders and considering future expansion requirements in emerging market opportunities . identify the specific decision which financial manager has to initiate and discuss the factors which are to be taken into the consideration, in this respect ( any four).

Answer 1

As per the given details, company enjoying the favourable yield through financial leverage can be identified as below

Company Rama LTD. will generate higher yield (dividend).

OR

Dividend decision.

Factors affecting dividend decision are;

(a) Stability of Dividend Every company adopts the policy of maintaining the stability of dividend per share. From this point of view, a little change in profit should not be allowed to increase or decrease the dividend.

(b) Legal Constraints Certain provisions of the Companies Act put restrictions on payouts as dividend. Such provisions must be adhered to while declaring the dividend.

(c) Access to Capital Market Large and reputed companies generally have easy access to the capital market and therefore may be depended less on retained earnings to finance their growth. These companies tend to pay higher dividends

(d) Cash position is better than more dividend and vise versa