Question 1 25 marks August Ltd has equity capital amounting

Question 1 25 marks August Ltd has equity capital amounting to N$350 million comprising ordinary share capital N$70million and retained earnings of N$280 million. The par value of a fully paid up share is N$10. August Ltd has a profit after tax for the year just ended of N$87.5 lion. The current market price of the share is N$110 and the dividend ratio is 60%. Debt amounts to N$420 million. Required: (a) Calculate the number of shares outstanding as well as the book value per share (b) Calculate the company\'s (i) EPS, (ii) PE ratio, (ii) Dividend per share, and (iv) the dividend yield (c) Determine the book value debt-equity ratio and the market value debt-equity ratio (d) Suppose the company decides to buy back shares worth N$41.8 million at the current market price. Explain the effect of this re-purchase on (i) Equity capital (ii) Market price of the share (iii) Dividend per share

Solution

(a) Ordinary Share Capital = $ 70 million, Paid Up Share Price = $ 10

Number of Shares Outstanding = 70 / 10 = 7 million

Equity Capital = $ 350 million

Net Income = Profit After Tax = $ 87.5 million and Dividend Payout Ratio = 60 %

Increase in Retained Earnings = (1- 0.6) x 87.5 = $ 35 million

Total Equity Capital = 350 + 35 = $ 385 million

Book Value Per Share = 385 / 7 = $ 55 per share

(b) (i) EPS = Profit After Tax / Number of Shares Outstanding = 87.5 / 7 = $ 12.5 per share

(ii)  PE Ratio = Market Price / EPS = 110 / 12.5 = 8.8

(iii) Dividend per Share (DPS) = (87.5 x 0.6 / 7) = $ 7 per share

(iv) Dividend Yield = DPS / Price = 7 / 110 = 0.06363

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