Post on 18-Nov-2014
Scotch Mitts Plc
Running head: Scotch Mitts Plc Dividend Policy
Scotch Mitts Plc Dividend Policy
[Name of the student]
[Name of the institute]
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Scotch Mitts Plc
Scotch Mitts Plc Dividend Policy
Introduction
The decision on the dividend policy of the company requires careful
judgments and estimates, as the impact it can have on shareholder value.
As financial director of the Scottish Mitts PLC you have requested the Board
of Directors of the company to advise them on possible factors they must
consider in determining the future dividend policy of the company.
The following questions have been asked to take into account
Does the modern theory of financial offer no guidance on the definition of
corporate dividend policy?
What are the practical considerations of the consequences of the decision
of optimal dividend policy for the company?
Prepare a discussion paper for submission to the Board of Directors that
the decision of 2 key issues and questions raised in the discussion above.
Dividend Policy in Practice
Dividends, periodic payments to shareholders to compensate them for the
delay in the consumption and use and the risk for their investment funds.
The decision of the Scottish Mitts PLC on dividends are often mixed with
other financial and investment decisions. Some firms pay low dividends because
management is optimistic about the future of Scottish Mitts PLC and aims to
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preserve profits for expansion. In this case, the dividends are a byproduct of the
Scottish Mitts PLC solutions of the capital budget. Another firm might finance
capital expenditures primarily through credit. This releases cash for dividends. In
this case, the dividends are a byproduct of borrowing decision.
Fischer Black (1976) wrote: "The more we look at the dividend picture, the
more it seems that mystery. Based on our study, this article will not cover all
aspects of dividend policy, but in terms of financial director, he tries to present a
summary report of the Board of Directors, in respect of certain matters to the
dividend policy decision-making in the UK market.
Dividend Theories
Theoretically, there is a typical 3 extensions are trying to explain the
Scottish Mitts PLC dividend policy, and the total value of shares:
Dividend Irrelevance Theory (Miller & Modigliani, 1961): that in recent years
known as the M & M? This theory claims that in a world with no market
imperfections such as taxes, transaction costs or asymmetric information, the
Scottish Mitts PLC dividend policy does not affect its value or cost of capital.
Investors estimate the dividends and capital gains equally. It is important
however is the assumption of independence of the investment policy of the
Scottish PLC Mitts of its dividend policy. Investment policy that all the questions,
as well as the values Scottish PLC Mitts are the present value of future cash
flows. As these cash flows are allocated between dividends and retained
earnings and then value.
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Given the investment policy of PLC's Scotch Mitts, dividend policy affects
only the level of external financing required (in addition to retained earnings) to
finance new investments and pay dividends. This means that every dollar of
dividends is the dollar capital gain is lost.
According to M & M, the single most important factor in determining the
market value of the company is its investment policy, since it is responsible for
the future profitability of the company. As a result, it does not matter, Scottish
Mitts PLC pays their income or not. The main assertion (and recommendations),
the underlying M & M proposal is that the manager has decided to subject the
dividends on investment decisions.
Example:
Scottish Mitts PLC paid a third of its value as a dividend and raise money by
selling new shares. Passing a value to new shareholders and the payment of
dividends; total cost PLC Scottish Mitts is not affected.
Before Dividends
After dividend
Total number of shares
Total number of shares
Each share is worth up to ...
... This is after is
New shareholders
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• Optimal dividend policy (Lintner & Gorden, 1962) 5: The proponents
believe that the dividend policy that the balance between current dividends and
future growth, to maximize the Scottish Mitts PLC's share price. Address investor
preference for dividends without selling the shares, arguing that capital gains “in
the bushes” are perceived as riskier than dividends "in the hand. Miller &
Modigliani refer to this theory as "a bird in the hand fallacy, assuming that most
investors will reinvest their dividends in the same or a similar company anyway,
and that in the long run is determined by the risk of asset cash flows are not
dividend policy.
This theory of Myron Gordon enough arguments on the investment policy
than on dividends. What is a "bird in the hand"-theory really say that the
company pays dividends low as a rule, risky investments. For this reason - and
not on the low dividend Perse - investors discount low income dividends (and
therefore risky) company to a greater extent. The market discounts future income
from risk-based companies, regardless of whether those revenues will be
retained or distributed. However, it is important to recognize that the higher risk
causes lower dividends, but not vice versa.
Dividend Relevance Theory (Graham & Dodd, 1988): The value of Scotland
PLC Mitts depends on its dividend policy. The optimal dividend policy is one that
maximizes the Scottish Mitts PLC values. Dividends are taxed at higher rates
than capital gains; investors require higher returns as the increase in dividend
yield.
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This theory suggests that the low rate of dividend payment will maximize the
Scottish Mitts PLC values. The results of empirical tests of these theories do not
mix and have not led to definitive conclusions. In less than the theoretical "real
world", companies budget for future dividend payments in the same way that the
budget of any other cash outflows such as requirements for debt service, capital
expenditures, or any foreseeable demand for cash. As a result, when the Board
of Directors establishes the general dividend policy, often in the face and always
taking into account the projected cash flows - not earnings. Thus, domestic
politics in Russia can be described as a certain percentage of cash flow, even for
companies that have expressed their public policy in terms of relationships or the
payment of interest earnings
In the real world, the market can not be completely effective or completely
ineffective. Markets mainly a mixture of both, and daily decisions and actions
may not always be immediately reflected in the market, moreover, if all
participants had the view that the market is efficient, no one will look for those
additional revenues, the force that holds the wheel Market turn.
Semi-strong market efficiency, as indicated, Jack Treynor, believes that the
market will not always be either quick or accurate in processing new information.
On the other hand, it is not easy to convert to be able to trade profitably against
the market consensus in the superior performance of the portfolio.
Report to Board of Directors
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As part of major financial policy choices, dividend policy will have a
significant impact on our net income and cash flow. In this report, we will observe
the relationship between dividend policy and the Scottish Mitts PLC values
issues. The next report will focus on these topics:
1. Why dividend policy comes into focus?
2. What impact dividend policy on our market value?
3. What impact dividend policy on our financial performance?
4. What factors may affect the dividend policy?
5. How are we going to pay dividends?
* Key assumptions:
A. Effectiveness of the market, as a rule, semi-strong form
B. Subject Company is a productive high-tech company
C. The main purpose of the firm is to maximize shareholder value
D. The company has been operating in a stable financial growing periods,
and is expected to occur. Meanwhile, fixed borrowing company.
Shall We Pay Dividend
In the previous, our Scottish Mitts PLC is a stable tendency of growth in
profits. Statement of financial reports of certain amounts of retained earnings at
the end of each year. We will pay the undistributed profits as dividends or
reinvest in the expansion is now becoming a major component of our financial
portfolio decisions.
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If not enough investments that generate a positive NPV, it is time to return
cash to shareholders. Potentially, compelling reasons for paying dividends:
Customers Argument: There are shareholders who, as dividends, or
because they appreciate the regular cash payments or do not face tax deficiency.
If these shareholders in our PLC Scottish mittens, paying bigger dividends will
increase the cost
Dividends as signals: Because dividends require cash from the company,
we can understand why investors favor firms with established records dividends,
not only to profits earned in accounting people. Investors refuse to believe the
Scottish Mitts PLC reported earnings announcements, if they are not supported
with appropriate dividend policy
Transfer of Wealth: After returning more money to shareholders, may be the
transfer of wealth from bondholders to shareholders.
These provisions mean that our dividend policy can be used as a signal to
increase investor confidence in the future performance of PLC's Scotch Mitts.
Dividend Policy & Market Value
As we know, the market value of PLC’s Scotch Mitts presents value of all
future dividends. Despite the fact that we have higher and higher pay increases
the confidence of the market, but also leaves less retained earnings to finance
future growth. Thus, we must find a balance between this compromise, the
current income to shareholders (dividends) & the future growth of the company
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(retained earnings). The price of shares allegedly will be the maximum when the
market thinks management has found just the right balance.
Initiation of dividends or increase can only be welcomed as a sign of higher
future earnings. It is worth noting that investors do not worry about the level of
dividend PLC Scottish Mitts, they are concerned about the change, which is
regarded as a key indicator of sustainable earnings. For example, if we have
sufficient opportunities for profitable investment, but the limited available funds,
share price may increase at the expense of current dividends to increase
investment. If we lack such investment, the shareholder may be better if the
excess money paid to them in the form of higher dividends. In such situations,
the signal sent to the market about domestic investment opportunities and future
of any company as it pleased.
Dividend Policy & Cash Flow
Cash flow only "real" thing to the best of Scotland PLC Mitts fiscal health.
Cash dividends have an inevitable impact on cash flow, which can be called
"shock cash flow."
Because high dividend policy will be costly if we do not have sufficient cash
flow to support it, dividend increases signal our happiness & confidence in the
leadership of future cash flows.
We assume that the method used for the distribution of cash flows reflects
the nature of the underlying cash flow process and creates expectations of
investors about the volatility of cash flow shocks. The hypothesis consists of two
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parts. First, share repurchases to distribute cash flow shocks, which are mainly
transitional, and cash dividends contain more permanent component. Secondly,
the market recognizes this relationship and uses messages of a method of
distribution to update their ideas about the constancy of the past and the present
cash flow shocks.
Dividend policy & human factors
Typically, there are some legal considerations about the Scottish Mitts PLC
dividend policy, which applies to all listed companies:
Dividends may be paid out of profits and should not be paid out of capital.
Dividends can not be paid if it would make the company insolvent.
Dividends limitations may exist in the covenants in trust deeds and loan
agreements.
Under the charge, if the company is able to pay the income from
dividends, then, as a rule, it should do so.
In the previous part of this report, we have already mentioned some factors
that should be taken into account when creating our dividend policy, such as:
Clients consequences
Presence of retained earnings
Earnings volatility
Long-term goals
Investment opportunities
Cash flow requirements
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It should be noted that, in accordance with the modeling agency, the
primary motivation of dividends, that if the Scottish Mitts PLC profits paid out as
dividends, corporate managers may divert cash flows for personal use or to
unprofitable investment projects. Payment of dividends can be considered as a
means to reduce the free cash flow that managers can use discretion 15.
How do we Pay Dividend
Dividend varies with the general volatility of future cash flows, not only
systematic or market-based component of risk 16. After a review of listed
companies during the past 40 years showed:
Dividend
Revenues
Source: Damodaran, Aswath, 1999, cash back to owners: dividend policy,
Stern School of Business at New York University. http://pages.stern.nyu.edu/ ~
adamodar/pdfiles/ovhds/ch10.pdf
We assume that managers should be aware of the negative consequences
of high dividends, which cuts on stock prices. As a result, when managers
anticipate the uncertainty of future cash flows, they reduce the payment to avoid
the possibility to reduce dividends in the future.
When there is a change in dividend policy, it may be accompanied by a
significant event news on markets, when we try to reduce the dividend, it can
also be a significant bad news for the market. The proposal is that the general
trend is a smooth cash dividend over time, and, as a rule, we just declare a
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dividend when it is sustainable. The reason for smoothing the curve by solving
for the changes to bring good news to the market.
The stability of dividends can be achieved through the proliferation of
conventional year dividends for the year. In exceptionally good years, some
extraordinary dividends can be paid. Dividends are appointed Ambassador
Extraordinary to inform shareholders that the additional dividends should not be
expected every year in the future. However, ordinary dividends should rise in
step with earnings. Thus, the board of directors sets the dividend at some target
share of long-term average earnings.
Conclusion
Dividend Policy in the heart of corporate finance, especially when it comes
to pay great attention to cash flows PLC's Scotch Mitts.
Decide what percentage of the net profits for dividends is the main policy
choices to managers because it determines which funds flow to investors and
what tools are stored in the PLC Scottish Mitts for reinvestment.
We see that dividends and share price are positively correlated; this does
not mean that the former causes the latter. In the long run, higher dividends
should be supported by higher incomes and, consequently, above the Scottish
Mitts PLC value and shareholder wealth, but it does not follow that an increase in
dividends would lead to those things!
We have already seen that if Scots Mitts PLC investment and,
consequently, the prospects are held fixed-income, higher dividends actually help
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to reduce stock prices. If you take the higher dividends greater share of future
earnings, the stock price (which is the PV of these future revenues, which
retained) will fall.
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References
R.A.Brealey, S.C.Myers, 1988, Principles of Corporate Finance, 3rd edition,
McGraw, USA, pp357
M.H.Miller, F.Modigliani, “Dividend Policy, Growth and the Valuation of
Shares”, Journal of Business, 34: 411~ 433 (October 1961)
Klaus Spremann, Pascal Gantenbein, 2001, Theories and Determinants of
Dividend Policy, Stefan Beiner, pp3
M.J.Gordon, “Dividends, Earnings and Stock Prices”, Review of Economics
and Statistics, 41: 99~105 (May 1959)
B.Graham, D.L.Dodd, 1934, Security Analysis: The Classic 1934 Edition,
McGraw Hill, USA
Jack Treynor, "What Does It Take to Win the Trading Game?" Financial
Analysts Journal, January/February 1981
Resource: Aswath Damodaran, Returning Cash to the Owners: Dividend
Policy, http://pages.stern.nyu.edu/~adamodar/pdfiles/ovhds/ch10.pdf, Slide 28
R.A.Brealey, S.C.Myers, A.J.Marcus, 2001, Fundamentals of Corporate
Finance, 4th edition, McGraw, USA, pp437
R.A.Brealey, S.C.Myers, 1988, Principles of Corporate Finance, 3rd edition,
McGraw, USA, pp357
R.A.Brealey, S.C.Myers, A.J.Marcus, 2001, Fundamentals of Corporate
Finance, 4th edition, McGraw, USA, pp438
J.M.Stern, D.H.Chew, 1998, The Revolution in Corporate Finance, 3rd
edition, Blackwell, USA, pp144
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Wayne Guay, Jarrad Harford, 1999, The cash-flow permanence and
information content of dividend increases versus repurchases, Resource:
http://jfe.rochester.edu/99249.pdf
Resource: http://www.mcgraw-hill.com.au/mhhe/fin/peirson7e/stu/Chap-
12.ppt, slide 6
Jensen, Michael C., 1986, Agency Cost of Free Cash Flow, Corporate
Finance, and Takeovers, American Economic Review 76(2), pp.323-329.
Resource: http://www.umich.edu/~reecon/restate/faculty/div1197.pdf,
Dividend Policy and Cash Flow Uncertainty
http://www.departments.bucknell.edu/management/apfa/Hamburg
%20Papers/Frankfurter.pdf, G.M.Frankfurter, B.G.Wood, Dividend Policy
Theories and Their Empirical Tests
Resource: http://www.infotoday.org/business/finance1/class1.pdf
Resource: http://www.peoi.org/Courses/finanal/ch/ch12a2.html
Klaus Spremann, Pascal Gantenbein, 2001, Theories and Determinants of
Dividend Policy, Stefan Beiner, pp1
Resource: http://www.st-andrews.ac.uk/~gss2/ec3123/ec4423lecture1.pdf,
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Bibliography
Arnold G. (2008) Corporate Financial Management, 4th edition, FT Prentice
Hall
Brav A., Graham J.R, Harvey C.R., and Michaely R, (2005) ‘Payout Policy in the
21st Century’, Journal of Financial Economics 77 483 – 527.
Dong M., Robinson C, and Veld C, (2005) ‘Why individual investors want
dividends’, Journal of Corporate Finance 12 121 – 158.
Inappropriate sources (eg Wikipedia, Tutor4u etc) may result in marks being lost.
Please avoid using direct quotes.
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Appendix 1
Abridged Income Statement for the year ended 30th September:
All amounts are in thousands of pounds sterling
2009 2008 2007
Sales 9606 7564 6100
Cost of goods sold 4748 3755 2834
Gross Profit 4858 3809 3266
Selling Expenses 1467 1250 1080
Installation Expenses 1689 1300 980
Administration Expenses 1013 683 650
Operating Profit 689 576 556
Corporation Tax 249 194 168
Profit After Tax 440 382 388
Dividends 241 280 210
Retained earnings 199 102 178
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Balance Sheet at 30th September:
2009 2008 2007
Non-current assets (net):
Land & Buildings2300 2400 2500
Plant & Machinery 1700 1186 552
Fixtures & Fittings 700 600 402
Motor Vehicles 185 140 105
Office equipment250 185 100
5135 4511 3659
Current Assets:
Inventories: Raw Materials 216 208 182
Work in Progress 200 205 190
Finished Goods 150 128 97
Receivables 1176 839 595
Bank/Cash 181 66 104
1923 1446 1168
Current Liabilities:
Payables 1190 788 270
Corporation Tax 449 394 368
Final Dividend 171 140 110
1810 1322 748
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Net Current Assets 113 124 420
Net Assets 5248 4635 4079
Shares & reserves
£1 ordinary shares 1000 1000 1000
Profit & loss 4248 3635 3079
Shareholders’ funds 5248 4635 4079
Share price £2.25 £2.45 £1.75
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