Chapter 8 - Dividends

Question 1

Factors to consider when paying dividend

Answer 1

• What do shareholders want?
  
  • turbulent share price - clientele effect
• How will market perceive?
  
  • signal to market
• Is cash available?
• Tax implications
• Policy of competitors
• Financing conditions e.g. covenants

Question 2

Dividend Policies

Answer 2

• Growth year on year
• Constant % of profit
• Zero dividend - all reinvested
• Residual theory - after all value enhancing projects
• Irrelevancy theory - only matters wealth over time

Question 3

Advantages of share buyback

Answer 3

• Doesn’t lead to future divi expectations
• Alters capital structure (debt/equity mix)
  
  • lower cost of capital
• Maybe tax benefits
• Defense against hostile takeover - less shares in market
• Less shares means higher EPS and share price

Question 4

Disadvantages of share buyback

(as opposed to paying divi)

Answer 4

• Increased divi seen as stronger expression of confidence
• Increased divi leads to higher share price
• Small investors not approached
• Negative signal if management participate
• Increases debt exposure

Question 5

Scrip dividend

Answer 5

• offered free shares instead of cash
• Reduces R.E., increases S.C.