QUESTION 4 Madiba Ltd’s optimal capital structure calls for 35% debt and 65% equity. The after-tax cost of debt is 12%; its cost of ordinary shares funding from retained earnings is 14%; and its...




QUESTION 4


Madiba Ltd’s optimal capital structure calls for 35% debt and 65% equity. The after-tax cost of debt is 12%; its cost of ordinary shares funding from retained earnings is 14%; and its marginal tax rate is 28%. Madiba Ltd’s has the following investment opportunities:






Supersonic:     Cost = R 50 000; IRR = 11.90%.


Telefunken:   Cost = R100 000; IRR = 13.00%


LG:                Cost = R150 000; IRR = 14.50%.


Sony:            Cost = R200 000; IRR =15.70%.




Madiba expects to have a net income of R250 000 and bases its dividend payment on the residual policy.





How much would Madiba Ltd’s pay in dividends (after accepting all profitable projects) if it were to follows the residual theory of dividends?









Jun 10, 2022
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