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Homework answers / question archive / QUESTION 4 4

QUESTION 4 4

Finance

QUESTION 4


4.1 DDT Co is a company that has a shortage of cash on hand but still wants to pay dividends to their shareholders. As an advisor to the company, advise them on what options they have with respect to dividend payments given their current situation.


4.2 A listed company’s stock price closed at R90. The company’s profit for the financial year was R10 billion, while the number of shares outstanding was 2 billion. Using the information above, calculate the firm’s price/earnings (P/E) ratio.

4.3 Rainbow Concrete Company’s earnings available to ordinary shareholders are R5 000 000 and the company has 200 000 ordinary shares in issue at R30 per share. The firm plans to pay R3 per share in cash dividends. If the firm can repurchase the shares at R40 per share, how many shares can be purchased instead of proceeding with the cash dividend payment?

QUESTION 5

The importance of fighting bribery and corruption has been recognized as a top global priority. A distinction is generally made between facilitation payments and outright bribery and corruption.

5.1 Explain your understanding of “facilitation payments” and use an example to support your answer.

5.2 Outline the negative effects of bribery and corruption in business.

5.3 Discuss top-level commitment and due diligence as best practices to manage bribery and corruption.

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Question 4.1)

If the company wants to go ahead with paying the dividend, the company has the following options:

  • The company can opt for a small delay in payment of dividend to earn the cash flows from operations to fulfill the dividend requirement.
  • The company can avail a short term facility from a bank to finance the payment
  • The company can opt for a dividend in terms of shares instead of a cash dividend.

Question 4.2) PE Ratio: 18.0

Stock Price: R90

Profit for the year: R 10 Billion

No. of shares outstanding: 2 Billiob

Earnings per share: R10 Billion / 2 Billion = R5.0

PE Ratio = R90 / R5 = 18.0

Question 4.3)

Earnings Available to shareholders = R5,000,000

No of shares outstanding = 200,000

Price per share = R30

Dividend per share = R3

Total Dividends = R 600,000

Repurchase price = R40

If the company uses entire earnings to repurchase, the company can repurchase = R 5,000,000 / R40 = 125,000

If the company uses only dividends to repurchase, the company can repurchase = R 600,000 / R40 = 15,000

Question 5.1)

Facilitation payments are an example of bribe given to officials in order to receive approvals for the business or in order to put on fast track certain.

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