Answer 1

As per Residual Theory of Dividends , if a firm is capable of generating extra Cash Flows post meeting all operating expenses
requirements , it calls for a higher valuation .It states that all available cash flow should be invested in
projects with a positive net present value. Then any money left over should be paid out to stockholders in the form of a divide
flow (FCF) is left.

Key Takeaways :
1.Residual dividend policies are adopted by companies to prioritize capital expenditures over immediate shareholder dividend
2.Companies
3.Management that maintain
adopts a residual
a residual dividend
dividend policy
policy investininthe
to invest growth opportunities
company’s from profits
development, such asbefore paying
upgrading shareholders ca
manufacturing t
methods
4.With antoimmediate
reduce waste, theoretically
reduction resulting
in dividend in greater
payouts long-term
and fluctuation in growth.
the amounts over time, management may need to justi
shareholders.
If a clothing manufacturer's decision to spend $100,000 on CapEx is the right one, the company can increase produ
machinery at a lower cost, and both of these factors can increase profits . As net Income increases the ROA ratio im
Example :
shareholders may be more willing to accept the residual dividend policy in the future.
However, if
NOTE : Return onthe firmassets
generates
(ROA),lower earnings
calculated as and continues
net income to fundbyCapEx
divided at the same
total assets, rate, shareholder
is commonly dividends
used to assess man
making and the success of a residual dividend policy.
As per Table 1 and given case scenario , we are not given an investment opportunity set so it is not possible to say with 100%
not following this policy. However, given the stable and steady increase in dividend payments, it is certainly unlikely to be the
Lancaster .
 Table - 1
Year DPS EPS Payout Ratio
1994 $.29 $1.32 22.30%
1995 $.37 $1.57 23.40%
1996 $.44 $1.71 25.70%
1997 $.48 $2.01 23.80%
1998 $.54 $2.22 24.30%
1999 $.59 $2.28 25.90%
2000 $.63 $2.51 25.10%
2001 $.67 $2.37 28.30%
Answer 2
As per Constant Payout Ratio, a firm pays a constant percentage of net as dividend to the shareholders. In other words, a sta
implies percentage of earnings paid out each year is fixed. Accordingly, dividends would fluctuate with earnings and are likely
wake of wide fluctuations earnings of the company. As a result, when the earnings of a firm decline substantially or a loss in a
according to the, target
As per Table-1 Ratiospayout ratio, is
of DPS/EPS would be low.
not same each year though it keeps on increasing year on year and although the num
stable over the last 5 years, it certainly is not"DPS divided by EPS" at the exact same level each year.
It also means the company will keep the ratio
the same. Moreover, there are several drawbacks associated with the Constant Payout Ratio policy and it is therefore not
 Table - 1
Year DPS EPS DPS/EPS
1994 $.29 $1.32 21.97%
1995 $.37 $1.57 23.57%
1996 $.44 $1.71 25.73%
1997 $.48 $2.01 23.88%
1998 $.54 $2.22 24.32%
1999 $.59 $2.28 25.88%
2000 $.63 $2.51 25.10%
2001 $.67 $2.37 28.27%
Answer 3
A fixed dollar dividend is the distribution of a specified dollar amount by the company according to a predetermined
schedule (such as quarterly or annually). This policy provides shareholders with a consistent source of liquidity, which tends
to build confidence among shareholders.

The Fixed Dollar or "Regular" dividend payment policy maintains that the firm would pay the exact same dollar
amount every dividend payment period and would only increase the dividend payment when it was very certain
that the new, higher dividend could be sustained in the long run as subsequent dividend cuts send a severely
negative signal to the market.

In the case of Lancaster Colony, the dividend payment amount is clearly different each year, so this
policy is not being followed.
 Table - 1
Year DPS EPS
1994 $.29 $1.32
1995 $.37 $1.57
1996 $.44 $1.71
1997 $.48 $2.01
1998 $.54 $2.22
1999 $.59 $2.28
2000 $.63 $2.51
2001 $.67 $2.37
Answer 4
Low Regular Plus Extra Policy: Low regular plus extra policy involves payment of low regular
dividends plus year end extras in good years. It is a policy based on paying a low regular
dividend, supplemented by an additional dividend, when earnings are higher than normal in a
given period.

The Low Regular and Extra Dividend policy holds that the firm will pay the same dollar
dividend over the first three quarters (dividends in the US are typically paid every quarter,
not just at year's end), then pay a fourth quarter dividend that is at least the same as, but
likely higher than that paid for each of the first three quarters. The amount of the yearend
dividend is a function of how well the company has done during the year and a function of
their investment opportunity set in the near future.

Although the data given in the case does not breakdown dividend payments by quarter, it is
very likely that Lancaster follows this policy coupled with the very conscience decision to
ensure that the annual amount of dividends continues to increase each year. We can also
safely assume that both the firm's investment opportunity set and how well they performed
have also been taken into consideration given that their dividends do not always increase
at the same rate or by the same dollar amount.
Answer 5&6
If Lancaster cut its dividend for the first time in 39 years, it would certainly send a
negative signal to the market causing the stock price to drop. However, Lancaster could
mitigate this reaction by coupling their dividend cut announcement with an explanation
that the reason for the cut is to allow the company to earn an even greater rate of return
58 by investing in internal projects that are highly profitable. Even still, the investor base
or investor composition might change from income seeking conservatives to more
aggressive growth-oriented investors. This will cause extra volatility in Lancaster's stock
as investors buy and sell their shares to transfer ownership .

Write some negative points ki if kisi ko dividend nahi milega toh usko kesa feel hoga and if wo agar board pe hoga company ke toh kya decision l
ny ke toh kya decision lega wo