(a) Two firms Alusunge Construction Limited (ACL) and Banja Corporation Limited (BCL) need to raise finance. ACL is in high-growth construction business with good prospects for future projects. The business is volatile and cash flows are difficult to predict. On the other hand BCL operates in a stable mature petroleum industry.
(i) All else being equal, which firm should borrow more, and why?
(ii) Consider company ACL only. The owners hold 55% of the issued share capital. How does this affect the decision to raise funds through equity?
(b) HPT Resources Limited provides telephone services over the internet. The company expects that its capital expenditure will amount to K40 million. The company’s net income after tax is K32.4 million. The company follows the residual approach to dividends. The company’s target capital structure is represented by a debt to equity ratio of 3:5. Determine the company’s dividend pay-out ratio.