Deciding how much earnings to retain and how much to return to ordinary shareholders is a key part of dividend policy. Drawing on the dividend policy literature critically discuss some of the factors that need to be considered by senior managers of a listed company when deciding on: a) the size of the annual dividend to return to its shareholders and the practical issues that need to be considered when deciding on the size of the dividend payment. Squeezeco is currently deciding on the level and form of its next dividend. It is considering three options: i. A cash dividend payment of 15p per share ii. A 5% scrip dividend iii. A repurchase of 15 % of ordinary share capital at the current market price Extracts form the company’s financial statements are given below                                         £m                         £m Operating profit                                           24.5 Taxation                                                        7.8 Distributable earnings                               16.7 Non-current assets                                     75 Current Assets Trade receivables              27 Inventory                             24 Cash                                    46                      97 Total Assets                                                 172 Equity Finance Ordinary Shares (50p)        26 Reserves                             108                    134 Current Liabilities                                            38 Total liabilities                                               172        b) If the current cum dividend share price is 432p, calculate the effect of the three options on the wealth of a shareholder owning 1250 shares in Squeezeco.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
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Chapter1: Financial Statements And Business Decisions
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Deciding how much earnings to retain and how much to return to ordinary shareholders is a key part
of dividend policy. Drawing on the dividend policy literature critically discuss some of the factors that
need to be considered by senior managers of a listed company when deciding on:
a) the size of the annual dividend to return to its shareholders and the practical issues that need
to be considered when deciding on the size of the dividend payment.

Squeezeco is currently deciding on the level and form of its next dividend. It is considering
three options:
i. A cash dividend payment of 15p per share
ii. A 5% scrip dividend
iii. A repurchase of 15 % of ordinary share capital at the current market price
Extracts form the company’s financial statements are given below

                                        £m                         £m
Operating profit                                           24.5
Taxation                                                        7.8

Distributable earnings                               16.7

Non-current assets                                     75
Current Assets
Trade receivables              27
Inventory                             24
Cash                                    46                      97

Total Assets                                                 172

Equity Finance
Ordinary Shares (50p)        26
Reserves                             108                    134
Current Liabilities                                            38

Total liabilities                                               172       

b) If the current cum dividend share price is 432p, calculate the effect of the three options on the wealth of a shareholder owning
1250 shares in Squeezeco. 

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