You are the financial manager of a competitive investment company in South Africa. You have been presented with two possible investments: Pink Limited and Purple Limited as shown below. You have been supplied with the following information regarding the two companies. Pink Limited Purple Limited Earnings before interest and tax R3 000 000 R4 000 000 Long term interest bearing debt R500 000 R800 000 Earnings attributable to shareholders R2 124 000 R2 822 400 Tax rate 28% 28% Share Capital R2 000 000 R5 000 000 Number of ordinary shares issued 200 000 400 000 Number of ordinary shares authorised 1 000 000 500 000 Current market price of the share R30 R20.00 Dividend per share R5 R3 As a financial manager you are very concerned about the dividend yield and dividend payout ratio as these will be your indicators of the return on your investments. Q.3.1 Calculate the dividend yield for both companies. Q.3.2 Calculate the dividend payout ratio for Pink Limited. Q.3.3 Calculate the price earnings ratio for Purple Limited.
You are the
|
Pink Limited |
Purple Limited |
|
|
Earnings before interest and tax |
R3 000 000 |
R4 000 000 |
|
Long term interest bearing debt |
R500 000 |
R800 000 |
|
Earnings attributable to shareholders |
R2 124 000 |
R2 822 400 |
|
Tax rate |
28% |
28% |
|
Share Capital |
R2 000 000 |
R5 000 000 |
|
Number of ordinary shares issued |
200 000 |
400 000 |
|
Number of ordinary shares authorised |
1 000 000 |
500 000 |
|
Current market price of the share |
R30 |
R20.00 |
|
Dividend per share |
R5 |
R3 |
As a financial manager you are very concerned about the dividend yield and dividend payout ratio as these will be your indicators of the return on your investments.
Q.3.1 Calculate the dividend yield for both companies.
Q.3.2 Calculate the dividend payout ratio for Pink Limited.
Q.3.3 Calculate the price earnings ratio for Purple Limited.
Q.3.4 With reference to your answers in questions Q.3.1 to Q.3.3, draft a memorandum to
management in which you make a recommendation as to which company would be
the better investment. Your recommendation should be substantiated with reasons.
Assume that the dividend payout ratio of Purple Limited is 42.52% and P/E ratio of
Pink is 2.82.
Q.3.5 Investors can use two methods to make money on the stock market. Name one of
these methods.
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