Lamri’s dividend capacity before implementing TE’s proposal ($8,266,000) is more than the dividend required for next year ($8,100,000). If the recommendation from TE is implemented as policy for next year then there is a possibility that Lamri will not have sufficient dividend capacity to make the required dividend payments. It requires $8,100,000 but will have $7,962,000 available. The reason is due to the additional tax that will be paid in the country in which Strymon operates, for which credit can not be obtained. Effectively 14% additional tax and 10% withholding tax will be paid. Some of this amount is recovered because lower additional tax is paid on Magnolia’s profits but not enough.
The difference between what is required and available is small and possible ways of making up the shortfall are as follows. Lamri could lower its growth rate in dividends to approximately 6·2% (7962/7500 – 1 x 100%) and have enough capacity to make the payment. However, if the reasons for the lower growth rate are not explained to the shareholders and accepted by them, the share price may fall.
An alternative could be to borrow the small amount needed possibly through increased overdraft facilities. However, Lamri may not want to increase its borrowings and may be reluctant to take this option. In addition to this, there is a possibility that because of the change of policy this shortfall may occur more often than just once, and Lamri may not want to increase borrowing regularly.
Lamri may consider postponing the project or part of the project, if that option were available. However, this must be considered in the context of the business. From the question narrative, the suggestion is that Lamri have a number of projects in the pipeline for the future. The option to delay may not be possible or feasible.
Perhaps the most obvious way to get the extra funds required is to ask the subsidiary companies (most probably Strymon) to remit a higher proportion of their profits as dividends. In the past Strymon did not make profits and none were retained hence there may be a case for a higher level of remittance from there. However, this may have a negative impact on the possible benefits, especially manager morale.
(Note: credit will be given for alternative relevant suggestions) |
