Thodes Incorporated (Pvt) Ltd has identified several investment opportunities that will
become available over the next three years and would like you to evaluate these projects.
They have asked that you use the NPV and IRR methods to determine if these
independent projects are acceptable. Each of these investments will occur one year apart
and the cash flows will start one year after the investment is made.
Table-1:
| Project | Cash Flows/Year (in thousands) | Length of
Project |
Cost and Date when Cost is
incurred |
| A | $ 2,300.00 | 5 years | $ 12,000.00 @t=1 |
| B | $ 3,000.00 | 5 years | $ 17,000.00 @t=2 |
| C | $ 2,800.00 | 5 years | $ 13,000.00 @t=3 |
| D | $ 2,100.00 | 5 years | $ 15,000.00 @t=4 |
The company currently has 2,000,000 shares outstanding and pays a dividend of $2 per
share.
With a high degree of certainty, Thodes has projected their income for the next four years
as follows, which includes the annual cash flows from the investments selected above:
Table-2:
| Year | Income After Taxes |
| 1 | $6,000.00 |
| 2 | $8,000.00 |
A. Tondhlana CUAC 207 Assignment June 2017
| 3 | $5,000.00 |
| 4 | $7,000.00 |
Required:
i. Explaining your findings, what is the NPV and IRR for each project at the time
the investment would be made?[10]
ii. Using each respective method which investments should be selected and justify
your conclusions.[10]
iii. Discuss how and why the above two methods conflict in their ranking of
investment projects and seek how such conflicts are resolved?[10]
iv. What will the dividends per share and the external financing required
if the current dividend per share is maintained? [10]
if the dividend per share payout ratio of 50% is maintained [10]
Justify your conclusions.
v. Briefly evaluate the various types of dividend policies that Thodes Incorporated
can adopt.[15]
vi. From your above response, if the dividend policy is considered a residual
decision, what will be the dividends per share and external financing requirement
in each year? Explain your answers. [15]
vii. Considering the above, under which policy will external financing is minimized?
Justify your conclusions. [5]
viii. Briefly discuss the factors that would influence Thodes’ dividend policy
formulation?[15]
[Total marks 100]
