Financial Management

QUESTION `5 (2 + 5 = 7 marks)

Altron Technology is expecting a period of high growth and has decided to reduce its annual dividend by 10% a year for the next three years. After that, it will increase the annual dividend by 6% per year for two years, followed by 7% per year for another two years and then it expects to maintain a constant growth of 5% per year.

Altron recently paid $1.80 dividend per share and investors require 13% return.

a. Draw a time line showing the expected dividends of Altron.

b. Calculate the value of Altron’s share.

QUESTION 6 (12 marks)

Salt Line Co needs a specific equipment for their desalination project and it has received two quotes.

Under first quote the initial manufacturing costs are $100,000, which will be followed by servicing costs of $3,000 a year at the end of each of the next three years. At the end of third year Salt Line will have to replace the equipment.

Under second quote, the initial manufacturing costs are $90,000, which will be followed by servicing costs of $8,000 a year at the end of Year 1, $9,000 at the end of Year 2, and $10,000 at the end of each of Years 3 and 4. At the end of fourth year Salt Line will have to replace the equipment.

The discount rate is 9%. Ignore depreciation and taxes. Calculate the annual equivalent cost (AEC) of each and explain which quote Salt Line should accept.