Professional Documents
Culture Documents
Chapter Seven Dividend Policy
Chapter Seven Dividend Policy
Chapter Seven
Dividend Policy
1 Introduction
2 Theories
2.1 Residual – If spare cash exists at the end of the year pay dividend.
85
86
2.3 Irrelevancy (M&M)
3 Practical Considerations
! Availability of cash
! What dividends do S/H want (clientele effect)?
! Signalling effect –payment of dividends indicates a healthy
company
! Retaining cash is a key source of finance.
! Dividend growth should be greater than inflation
! Tax impact upon S/H
! Effect the dividend will have on dividend cover (EPS/DPS)
! Number of investment opportunities will restrict dividend
payments.
! Risk-paying now is safer than promising to pay next year
! Is the dividend within the company law regulations?
86
87
4 Alternatives to Cash Dividends
4.1.1 The S/H will receive extra shares instead of cash on a pro rata
basis.
4.1.2 This will allow the S/H to sell extra shares for cash and the gain will
be subject to CGT.
4.2.1 If the board has “one off” period of excess cash, they could
consider a share buy back.
4.2.2 Considerations:
87
88
4 Maximum Dividend Payable and Free Cash Flows (FCF)
4.1 Free Cash Flows will be discussed in great detail in a later chapter.
It is worth noting that the MAXIMUM DIVIDEND PAYABLE in any year will
be equal to the FCF available to the equity holders. ie FCFe.
88
89
Past ACCA P4 Question – Limni Co
89