Integrated Project Part 4 - Dividend Policy (1)

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Complete calculation problem Appendix 7: Dividends Appendix 7 Calculation Problem -Part 4 - Dividend Policy Assume information below apply to your company. It is December, the time for the board of directors to decide on dividend payments and next year’s c Management has identified several new investment projects with total costs of $1,300,000. The CFO Required a) Calculate the amounts of debt and equity that the company should use to finance these new inv b) Calculate the firm’s cash dividend payment for fiscal year. (1 marks) Identify other cash dividend c) Calculate the maximum capital budget that the firm can accept if it does not pay cash dividends d) A possible solution to the problem of not paying cash dividends as discussed in part (c) is to sub

capital spending. The company follows a constant dividend payout ratio policy, with a long-term payou O has to make recommendations to the board of directors on how much cash dividend to pay out and vestment projects under the current capital structure. Indicate how the company will raise these amo d policies that are available to the company. Briefly explain what differences the alternative dividend p s and maintains its existing capital structure. Indicate how much new debt the firm must issue in order bstitute a non-cash dividend for the cash dividend. Identify non-cash dividend alternatives. Briefly expl

ut ratio of 30%, and a policy of maintaining a debt-to-equity ratio of 40% to 60%. The accounting depa d how to finance the coming year’s investment projects. As an assistant to the CFO, you have been ass ounts. (2 marks) policies would make to the firm in terms of the amount of cash paid out and its investing and financing r to maintain its current debt-to-equity ratio. (2 marks) Briefly explain one potential problem that this lain why the company might choose cash dividends over non-cash dividends, or vice versa. (2 marks)

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artment ha signed to st g options. s change in

as just completed the company’s annual income statement showing annual net earnings of $1,100,000. tudy the following issues. (3 marks) n the firm’s dividend policy may cause. (2 marks)

a) Cost of New Projects 1,300,000 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid (330,000) Retained Profits 770,000 Financing from Retained Profits 780,000 Remaining Financing Requirement 320,000 Debt 40% 128,000 Equity 60% 192,000 b) Annual Income 1,100,000 Dividend Payout Ratio 30% Dividend Payment for the Fiscal Year 330,000 c) Cost of New Projects 1,833,333 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid - Retained Profits 1,100,000 Financing from Retained Profits 1,100,000 Remaining Financing Requirement 733,333 Debt 40% 733,333 Equity 60% 1,100,000 Appendix 7: Calculation Problem Part A: Debt and Equity In order to maintain the current debt to equity of 40:60, the company will have to finance the new the retained profits after paying dividends. In this case, $770,000 will be financed from the profits financing requirement, 40% will be financed form debt i.e., $212,000 and 60% will be paid form eq Cost of New Projects 1,300,000 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid (330,000) Retained Profits 770,000 Financing from Retained Profits 770,000 Remaining Financing Requirement 530,000 Debt 40% 212,000 Equity 60% 318,000

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There are various ways to raise debt and equity financing both. In order to raise the equity financin rights issue, which gives an option to the current shareholders of the company to purchase new or On the other hand, debt financing can be raised by raising term loans from a single bank or a syndi Part B: Dividend Policy The company is currently following a constant dividend policy by paying a fixed certain portion of i of 30%. In constant dividend policy, dividends vary with the varying levels of profit and investors ex the company will pay a total of $330,000 in dividends by following its current dividend policy. Annual Income 1,100,000 Dividend Payout Ratio 30% Dividend Payment for the Fiscal Year 330,000 There are basically two other dividend policies that the company can follow apart from the constan policy. In stable dividend policy, a steady and predictable dividend is paid to the investors each yea policy, investors get dividends, irrespective of the earnings. On the other hand, in residual dividend policy, company pays dividends from the remaining profits next year. This approach to paying is volatile and but it makes mor sense for the growing companie Part C: Maximum Capital Budget If the company decides to pay no cash dividends in the year, it can finance $1.1 million of capital sp has to be financed by the debt and 60% by the equity in order to maintain the current capital struc current capital structure. Cost of New Projects 1,300,000 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid - Retained Profits 1,100,000 Financing from Retained Profits 1,100,000 Remaining Financing Requirement 200,000 Debt 40% 80,000 Equity 60% 120,000 Change in dividend policy i.e., paying no cash dividends may send a negative signal in the market t pay the dividends and hold up to its dividend policy. This can create negative sentiment in the mar price of shares (Liao, Lin, Li, & Chih, 2022), as well. Part D: Non-Cash Dividend Alternatives An alternative to paying cash dividends is paying stock dividends to the shareholders. In stock divid can choose to pay stock dividends instead of cash dividends due to the shortage or lack of availabi have large capital spendings often choose to pay stock dividends instead of cash dividends (Lowe, dividends. Cash dividends have high tax implications for the shareholders i.e., tax rates to be paid on the divid to pay for the taxes. Furthermore, stock dividends cause total number of shares of the company to company to remain at the same level price per share of the company decreases or adjusted downw dividends. In addition, another key benefit of the stock dividend is that shareholders can choose to keep the s sell the shares to immediately earn a return on the new shares issued (Baker, 2009). In this case, company can choose to pay stock dividends instead of the cash dividends in order to r company.

company. References Baker, H. K. (2009). Dividends and Dividend Policy. USA: Wiley. Liao, W.-J., Lin, Y.-E., Li, X.-Z., & Chih, H.-H. (2022). The Effects of Behavioral Foundations and Busine Lowe, M. (2021). Dividend Investing: Simplified - The Step-by-Step Guide to Make Money and Crea Publishing LLC. Sasso, L. (2013). Capital Structure and Corporate Governance: The Role of Hybrid Financial Instrum

w projects 40% by debt and 60% by the equity after partially funding from retained after paying the dividends. From the remaining $530,000 quity i.e., $318,000.

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ng, the company can issue new shares to its current shareholders through r additional shares (Sasso, 2013). icate of different banks (Sasso, 2013). its yearly earnings to the investors i.e., have a fixed dividend payout ratio xperience full level of volatility in earnings (Baker, 2009). In the fiscal year, nt dividend policy that are stable dividend policy and residual dividend ar, which most of the income-oriented investors seek (Baker, 2009). In this s after all capital expenditures (CAPEX) and working capital needs of the es who have higher CAPEX and working capital needs (Baker, 2009). pending from the retained profits and from the remaining $200,000, 40% cture. In this case, the company will raise $80,000 debt to maintain its that company might be having cash problems and that is why, unable to rket about the reputation of the company and can also impact the market dend, companies give new shares to the existing shareholders. Companies ility of liquid funds and cash in the company. Growing companies who 2021). However, there are pro and cons attached to the both types of dends are often very high. For stock dividends, shareholders do not have o increase. In this case, in order to total market capitalization of the wards (Lowe, 2021). However, share prices are not affected by the cash shares in order to make more money on these in the future or can also re-invest the cash into the capital project opportunities available to the

ess Strategy on Corporate Dividend Policy. Frontier in Psychology. ate Passive Income in the Stock Market with Dividend Stocks. USA: Alakai ments. New York: Wolters Kluwer.

a) Cost of New Projects 1,300,000 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid (330,000) Retained Profits 770,000 Financing from Retained Profits 780,000 Remaining Financing Requirement 320,000 b) Annual Income 1,100,000 Dividend Payout Ratio 30% Dividend Payment for the Fiscal Year 330,000 c) Cost of New Projects 1,833,333 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid - Retained Profits 1,100,000 Financing from Retained Profits 1,100,000 Remaining Financing Requirement Debt 40% 733,333 Equity 60% 1,100,000 Appendix 7: Calculation Problem Part A: Debt and Equity In order to maintain the current debt to equity of 40:60, the company will have to finance the new the retained profits after paying dividends. In this case, $770,000 will be financed from the profits financing requirement, 40% will be financed form debt i.e., $212,000 and 60% will be paid form eq Cost of New Projects 1,300,000 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid (330,000) Retained Profits 770,000 Financing from Retained Profits 770,000 Remaining Financing Requirement 530,000 Debt 40% 212,000 Equity 60% 318,000

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There are various ways to raise debt and equity financing both. In order to raise the equity financin rights issue, which gives an option to the current shareholders of the company to purchase new or On the other hand, debt financing can be raised by raising term loans from a single bank or a syndi Part B: Dividend Policy The company is currently following a constant dividend policy by paying a fixed certain portion of i of 30%. In constant dividend policy, dividends vary with the varying levels of profit and investors ex the company will pay a total of $330,000 in dividends by following its current dividend policy. Annual Income 1,100,000 Dividend Payout Ratio 30% Dividend Payment for the Fiscal Year 330,000 There are basically two other dividend policies that the company can follow apart from the constan policy. In stable dividend policy, a steady and predictable dividend is paid to the investors each yea policy, investors get dividends, irrespective of the earnings. On the other hand, in residual dividend policy, company pays dividends from the remaining profits next year. This approach to paying is volatile and but it makes mor sense for the growing companie Part C: Maximum Capital Budget If the company decides to pay no cash dividends in the year, it can finance $1.1 million of capital sp has to be financed by the debt and 60% by the equity in order to maintain the current capital struc current capital structure. Cost of New Projects 1,300,000 Debt to Equity 40:60 Annual Income 1,100,000 Dividends Paid - Retained Profits 1,100,000 Financing from Retained Profits 1,100,000 Remaining Financing Requirement 200,000 Debt 40% 80,000 Equity 60% 120,000 Change in dividend policy i.e., paying no cash dividends may send a negative signal in the market t pay the dividends and hold up to its dividend policy. This can create negative sentiment in the mar price of shares (Liao, Lin, Li, & Chih, 2022), as well. Part D: Non-Cash Dividend Alternatives An alternative to paying cash dividends is paying stock dividends to the shareholders. In stock divid can choose to pay stock dividends instead of cash dividends due to the shortage or lack of availabil have large capital spendings often choose to pay stock dividends instead of cash dividends (Lowe, dividends. Cash dividends have high tax implications for the shareholders i.e., tax rates to be paid on the divid to pay for the taxes. Furthermore, stock dividends cause total number of shares of the company to company to remain at the same level price per share of the company decreases or adjusted downw dividends. In addition, another key benefit of the stock dividend is that shareholders can choose to keep the s sell the shares to immediately earn a return on the new shares issued (Baker, 2009). In this case, company can choose to pay stock dividends instead of the cash dividends in order to r company.

w projects 40% by debt and 60% by the equity after partially funding from retained after paying the dividends. From the remaining $530,000 quity i.e., $318,000.

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Eager to read complete document? Join bartleby learn and gain access to the full version

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ng, the company can issue new shares to its current shareholders through r additional shares (Sasso, 2013). icate of different banks (Sasso, 2013). its yearly earnings to the investors i.e., have a fixed dividend payout ratio xperience full level of volatility in earnings (Baker, 2009). In the fiscal year, nt dividend policy that are stable dividend policy and residual dividend ar, which most of the income-oriented investors seek (Baker, 2009). In this s after all capital expenditures (CAPEX) and working capital needs of the es who have higher CAPEX and working capital needs (Baker, 2009). pending from the retained profits and from the remaining $200,000, 40% cture. In this case, the company will raise $80,000 debt to maintain its hat company might be having cash problems and that is why, unable to rket about the reputation of the company and can also impact the market dend, companies give new shares to the existing shareholders. Companies lity of liquid funds and cash in the company. Growing companies who 2021). However, there are pro and cons attached to the both types of dends are often very high. For stock dividends, shareholders do not have o increase. In this case, in order to total market capitalization of the wards (Lowe, 2021). However, share prices are not affected by the cash shares in order to make more money on these in the future or can also re-invest the cash into the capital project opportunities available to the

ess Strategy on Corporate Dividend Policy. Frontier in Psychology. ate Passive Income in the Stock Market with Dividend Stocks. USA: Alakai ments. New York: Wolters Kluwer.

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