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IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company

Shree Textiles Ltd needs Rs 50 crore. Its profit after tax is Rs 40 crore and it normally pays out 60% as dividends. It has no spare cash. If it keeps its payout ratio unchanged and uses all retained profit, how much must be raised externally?

Rs 34 crore must be raised externally. Dividends at a 60% payout are Rs 24 crore, leaving Rs 16 crore retained from Rs 40 crore profit. Subtracting this internal funding from the Rs 50 crore requirement leaves Rs 34 crore to come from outside sources.

  1. ARs 10 crore
  2. BRs 16 crore
  3. CRs 24 crore
  4. DRs 34 croreCorrect
  5. Rs 40 crore

Explanation

Dividends are 60% of 40 = Rs 24 crore, so retained profit is 40 - 24 = Rs 16 crore. External finance needed is 50 - 16 = Rs 34 crore. Rs 10 crore results from using 40 - 50 ignoring dividends; Rs 24 crore mistakenly treats dividends as the retention.

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