Y Ltd. recently reported the following income Statement: (in Crore) Sales 600 Operating Cost 470 EBIT 130 Interest 40 EBT 90 Taxes @ 40% 36 EAT (Net Income) 54 Dividend 21.6 Retained Earnings 32.4 This year company is fo

CS Executive · Corporate Accounting and Financial Management · PYQS · December 2023
Y Ltd. recently reported the following income Statement: (in Crore) Sales 600 Operating Cost 470 EBIT 130 Interest 40 EBT 90 Taxes @ 40% 36 EAT (Net Income) 54 Dividend 21.6 Retained Earnings 32.4 This year company is forecasting 25% increase in sales and it expects that its year end operating cost will be around 70% of sales. It is expected that tax rate, interest and dividend pay-out ratio will be constant. You are required to compute projected Net Income and expected growth rate in dividend.

Answer & Explanation:

Computation of Projected Net Income and Expected Growth Rate in Dividend for Y Ltd. 1. Projected Income Statement: Particulars Amount (₹ in crore) Sales (600 + 25% increase) 750 Less : Operating cost (70% of 750) 525 EBIT 225 Less : Interest (constant) 40 EBT 185 Less : Tax @ 40% 74 EAT (Net Income) 111 Dividend (40% of 111) 44.40 Retained Earnings 66.60 2. Calculation of Expected Growth Rate in Dividend: Note 1: Dividend Pay-out Ratio (Existing Year) Dividend Pay-out Ratio = (Dividend / Net Income) × 100 = (₹ 21.6 crore / ₹ 54 crore) × 100 = 40% (This is given to be constant for the projected year) Note 2: Expected Growth Rate in Dividend Expected Growth Rate in Dividend = [(Projected Dividend - Current Dividend) / Current Dividend] × 100 = [(₹ 44.40 crore - ₹ 21.6 crore) / ₹ 21.6 crore] × 100 = (₹ 22.8 crore / ₹ 21.6 crore) × 100 = 105.55%

Topics: Financial Management

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