Case Distribution To Shareholders About Dividend

STUDENT : Aille Kimberly COURSE CODE : AC46200 SEMESTER/ SEASSIONS : 2022/2023 Sessions Case Study Distribution to Shareholders About Dividend and Purchase Return Share A1. What is meant by the term distribution policy? • Distribution policy is defined as company policy regarding to pay earnings as dividends versus holding it toreinvest in the company. • The distribution policy includes: 1. How much free cash flow should be passed on toshareholders? 2. How should cash be provided to shareholders- improve dividend repurchase share? 3. Keep it up policy payment which stable or let payment varied because conditions changed? A2. The terms "irrelevant", "bird in hand", and "tax" • Preference has been used to describe three main theories: about how dividend payments affect firm value. Explain what these terms mean, and briefly explain each one theory. Dividend no relevant. • Believes that the value of the company is only determined by gain power and not be influenced by the way in which profit is divided between dividends and retained earnings. • Investors can influence their return on stocks regardless stock dividend: 1. If the company's dividend is too small, investors can sell some company stock to mimic her cash flow expect. 2. If dividend company too big, so investors can buy more stock with dividends that exceed investors • Theory Bird in Hand Myron Gordon and John Lintner, argue that investors consider one dollar dividend in hand not enough risky than a dollar of potential future capital gains in bush. Because of that, shareholders prefer dividends. Investors will perceive companies with high payout ratios as less risky and higher value than those with low payout ratios, all other things being equal. • Preference tax Theory preference tax confess that there is three. Related reasons to believe that investors may preferdividend payout to high payout: 1. Long-term capital gains are taxed at a lower rate because compared to dividend income. 2. Taxes are not paid on capital gains until the shares are sold. So, investors can control when capital gains are realized. 3. If a share is held by a person until he dies, there is no capitalprofits tax payable at all beneficiary receiving Shares can use the value of shares on the day of death as fee basis and thus escape capital gains tax. A.3 what which intended third theory? About management action must take to dividend rule? • If theory irrelevance dividend correct, so dividend policy no there is consequences, and the company can pursue a dividend policy. • If theory "bird in hand" correct, company must set a payment tall ifwant to maximize share price. • If theory preference tax correct, company must set a payment low if wants to maximize its share price. Therefore, the theories are mutually exclusive contradict each other. B.1 what "content information", or"signal", hypothesis? • According to the dividend signal hypothesis, dividend change announcements trigger returns stocks because they convey information about management's assessment of the valuationfuture prospect company. • Managers don't like to cut dividends, so won't raise dividends unless they do think that the raise is sustainable. So, dividend investor views are increasing as a signal of management's view of the future. • By because of that, price increases stock on when dividends increase could reflect higher expectations for future eps, not a desirefor dividends. B.2. Discuss client effects ● Different groups of investors, or clients, prefer different dividend policiesdifferent. ● The company's past dividend policy determines its current customers frominvestors. ● Client securities inhibit dividend policy changes. Taxes and brokerage fees detrimental to investors who have to switch companies. ● The result: the company stuck with their dividend payout policy. B.3. Discuss the effect on distribution policy ● Signal effect ○ A company may need to cut dividends to investin new value creation projects ○ But company will punished by market, because investors in a manner behavior conditioned to believe that a dividend cut is bad news. ○ Thus, companies need to be aware of the patterns that are applied of signal effects, and so, in a way, forced to maintain the dividend rate. ○ Different categories of clients have different dividend preferences. ■ Investors in their different peak earnings years in high tax brackets and who do not need income cash moment this must more choose share with payment low. ■ Pensioners, retirement funds, and university endowments are in low (or zero) tax bracket, and they need current cash income. Therefore, the shareholder groupit may favor high paying stocks. ○ Changes in dividend policy must consider the composition of the client ■ Consider the composition of the client ■ Ease of customization for clients C.1.Assume that SSC has a planned capital budget of $800,000 for year future. You has determine that structure capital moment this (60% equity and 40% debt) is optimal, and the net profit is estimated at $600,000. Use approach model dividend residual for determine dividend total SSC dollars and payout ratios. In the process, explain how to model dividends residual work. Then explain what will happen if net profit estimated as big $400,000 and $800,000? Answer: For set target distribution ratio, step that is: - Determine the optimal capital budget - Determine the amount of equity needed to finance the budget - Use the reinvested income to meet requirementsequity - Pay dividends or buy back shares only if there is more incomeavailable Of the $800,000 required for the capital budget, 0.6($800,000) = $480,000 must be collected as equity - If the net income exceeds the amount of equity the company requires, then the company must pay the remainder in the form of dividends. - Since $600,000 of income is available, and only $480,000 is needed, then the remainder is $600,000 - $480,000 = $120,000, - So, this is the amount to be paid as dividends. - the payout ratio is $120,000/$600,000 = 0.20 = 20%. C2. In general, how do changes in investment opportunities affect ratios payment under residual payment policy? Answer: Changes in the investment opportunity will lead to an increase (if the investment opportunity good) or a decrease (if the investment opportunity is not good) in the amount of equity invested needed, therefore in the remainder of the dividend payout. More investment needs >> more need to hold income >>payout ratio is less or zero Less need for investment >> less need to hold income >>higher payout ratio C3. What are the advantages and lack of dividend policy residuals? ● Profit: - Reducing new stock issues and flotation costs - Help set target payment ● Loss: - Policy the no have targets client certain. - May cause signals to the contrary of interestcompany - The amount paid as dividends fluctuates greatly if the policythis is practiced D. What that plan reinvestment dividend (drip), and how method work? Under a dividend reinvestment plan (drip), shareholders have the option of: automatically reinvest their dividends in the company's common stock. In an open market purchase plan, the trustee collects all dividends to reinvest and then buy shares on the open market. Holder stocks use infusions for three reasons: (1) reduced intermediary fees volume purchases, (2) infusions are a convenient way to invest excess funds, and (3) the company generally pays all associated administrative costs operation. In plan stock new, company emit stock new to member drip as replacement: cash dividends. No fees are charged, and many companies do offering shares at a 5 percent discount from the market price on the dividend date on the grounds that the company avoided flotation costs that should have been incurred. Only companies that need new equity capital use stock plans new, while companies that do not require the use of new stock plans open market purchases. E. Explain suite steps which taken policy dividend inthe practice of most companies Companies set dividend policies within the framework of their financial plans on a regular basiswhole. The steps in setting the policy are listed below: a) The company estimates its annual capital budget and annual sales, along with working capital requirements b) Structure capital target, possible which minimize WACC while maintain sufficient reserve loan capacity to provide flexibility financing,” will also be established c) Taking into account the capital structure and investment requirements, the company can estimate the approximate amount of debt and equity financing required during each year during the planning period d) Ratio payment target period long then determined based on draftresidual models e) The actual dollar dividend will be decided. The size of this dividend will be reflects: 1. Ratio payment target period long 2. Probability that dividend, after set must lowered or more again removed If there is a lot of uncertainty about cash flows and capital requirements, then dividends a relatively low starting dollar would be set, as this would minimize the odds that the company must reduce dividends or sell new common stock. F. What is a share buyback? Discuss the advantages and disadvantagesthe company buys back its own stock! A share buyback is when a company decides to distribute cash to shareholders by buying back their own shares rather than paying out cash dividends. Shares buyback can be used as follows: 1. As alternative dividend regular. 2. To dispose of excess cash. 3. In connection with changes in capital structure. Profit: 1. Signal positive to market. 2. The shareholder's choice to pay taxes or retain shares. 3. For avoid adverse share price reactions. 4. Generate change massive in structure capital. Lack: 1. Purchase return can lower stock price. 2. Penalties may be imposed if the repurchase is made primarily for save taxes on dividends. 3. Shareholders may not be fully informed about the buyback. 4. The company may overpay for its stock. G. What is a dividend return investment plan? And how does it work? Under a dividend reinvestment (drip) plan, shareholders have the option toautomatically reinvest their dividends in the company's common stock. Shareholders do this for 3 reasons: 1. Intermediary fees minus the volume of purchases 2. Is an easy way to invest excess funds 3. Companies generally pay for all administration related to operations. In plan stock new, company publish share new to member as substitute for cash dividends. No fees are charged, and even companies do a lot offer shares at a discount of 5 percent of market price on the dividend date Notes: Only companies that need new equity capital use a stock plan new, whereas company that does not require new stock using the plan open market purchases.