Page 207 - DMGT409Basic Financial Management

Basic Financial Management

Notes Solution:

I If R>K (12% > 11%)
( −
E1 b )
P = 1
−
Kb r
1. D/P ratio of 10%. Retention ratio = 90%
15 (1 0.9− )
P =
−
×
0.11 0.9 0.12
= ` 750
2. D/P ratio of 30%. Retention ratio = 70%
15 (1 0.7− )
P =
−
×
0.11 0.7 0.12
= ` 173.08
3. D/P ratio of 50%. Retention ratio = 50%
15 (1 0.5− )
P =
×
−
0.11 0.5 0.12
= ` 125
II If R=K (11% = 11%)

(a) D/P ratio of 10%. Retention ratio = 90%
15 (1 0.9− )
P =
×
−
0.11 0.9 0.11
= ` 136.36
(b) D/P ratio of 30%. Retention ratio = 70%
15 (1 0.7− )
P =
−
×
0.11 0.7 0.11
= ` 136.36
(c) D/P ratio of 50%. Retention ratio = 50%
15 (1 0.5− )
P =
−
×
0.11 0.5 0.11
= ` 136.36
III If R<K (10% < 11%)
1. D/P ratio of 10%. Retention ratio is 90%

15 (1 0.9− )
P =
×
−
0.11 0.9 0.10
= ` 75

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