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Scotch Mitts Plc Running head: Scotch Mitts Plc Dividend Policy Scotch Mitts Plc Dividend Policy [Name of the student] [Name of the institute] 1

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Page 1: Scotch Mitts Plc

Scotch Mitts Plc

Running head: Scotch Mitts Plc Dividend Policy

Scotch Mitts Plc Dividend Policy

[Name of the student]

[Name of the institute]

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Scotch Mitts Plc

Scotch Mitts Plc Dividend Policy

Introduction

The decision on the dividend policy of the company requires careful

judgments and estimates, as the impact it can have on shareholder value.

As financial director of the Scottish Mitts PLC you have requested the Board

of Directors of the company to advise them on possible factors they must

consider in determining the future dividend policy of the company.

The following questions have been asked to take into account

Does the modern theory of financial offer no guidance on the definition of

corporate dividend policy?

What are the practical considerations of the consequences of the decision

of optimal dividend policy for the company?

Prepare a discussion paper for submission to the Board of Directors that

the decision of 2 key issues and questions raised in the discussion above.

Dividend Policy in Practice

Dividends, periodic payments to shareholders to compensate them for the

delay in the consumption and use and the risk for their investment funds.

The decision of the Scottish Mitts PLC on dividends are often mixed with

other financial and investment decisions. Some firms pay low dividends because

management is optimistic about the future of Scottish Mitts PLC and aims to

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preserve profits for expansion. In this case, the dividends are a byproduct of the

Scottish Mitts PLC solutions of the capital budget. Another firm might finance

capital expenditures primarily through credit. This releases cash for dividends. In

this case, the dividends are a byproduct of borrowing decision.

Fischer Black (1976) wrote: "The more we look at the dividend picture, the

more it seems that mystery. Based on our study, this article will not cover all

aspects of dividend policy, but in terms of financial director, he tries to present a

summary report of the Board of Directors, in respect of certain matters to the

dividend policy decision-making in the UK market.

Dividend Theories

Theoretically, there is a typical 3 extensions are trying to explain the

Scottish Mitts PLC dividend policy, and the total value of shares:

Dividend Irrelevance Theory (Miller & Modigliani, 1961): that in recent years

known as the M & M? This theory claims that in a world with no market

imperfections such as taxes, transaction costs or asymmetric information, the

Scottish Mitts PLC dividend policy does not affect its value or cost of capital.

Investors estimate the dividends and capital gains equally. It is important

however is the assumption of independence of the investment policy of the

Scottish PLC Mitts of its dividend policy. Investment policy that all the questions,

as well as the values Scottish PLC Mitts are the present value of future cash

flows. As these cash flows are allocated between dividends and retained

earnings and then value.

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Given the investment policy of PLC's Scotch Mitts, dividend policy affects

only the level of external financing required (in addition to retained earnings) to

finance new investments and pay dividends. This means that every dollar of

dividends is the dollar capital gain is lost.

According to M & M, the single most important factor in determining the

market value of the company is its investment policy, since it is responsible for

the future profitability of the company. As a result, it does not matter, Scottish

Mitts PLC pays their income or not. The main assertion (and recommendations),

the underlying M & M proposal is that the manager has decided to subject the

dividends on investment decisions.

Example:

Scottish Mitts PLC paid a third of its value as a dividend and raise money by

selling new shares. Passing a value to new shareholders and the payment of

dividends; total cost PLC Scottish Mitts is not affected.

Before Dividends

After dividend

Total number of shares

Total number of shares

Each share is worth up to ...

... This is after is

New shareholders

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• Optimal dividend policy (Lintner & Gorden, 1962) 5: The proponents

believe that the dividend policy that the balance between current dividends and

future growth, to maximize the Scottish Mitts PLC's share price. Address investor

preference for dividends without selling the shares, arguing that capital gains “in

the bushes” are perceived as riskier than dividends "in the hand. Miller &

Modigliani refer to this theory as "a bird in the hand fallacy, assuming that most

investors will reinvest their dividends in the same or a similar company anyway,

and that in the long run is determined by the risk of asset cash flows are not

dividend policy.

This theory of Myron Gordon enough arguments on the investment policy

than on dividends. What is a "bird in the hand"-theory really say that the

company pays dividends low as a rule, risky investments. For this reason - and

not on the low dividend Perse - investors discount low income dividends (and

therefore risky) company to a greater extent. The market discounts future income

from risk-based companies, regardless of whether those revenues will be

retained or distributed. However, it is important to recognize that the higher risk

causes lower dividends, but not vice versa.

Dividend Relevance Theory (Graham & Dodd, 1988): The value of Scotland

PLC Mitts depends on its dividend policy. The optimal dividend policy is one that

maximizes the Scottish Mitts PLC values. Dividends are taxed at higher rates

than capital gains; investors require higher returns as the increase in dividend

yield.

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This theory suggests that the low rate of dividend payment will maximize the

Scottish Mitts PLC values. The results of empirical tests of these theories do not

mix and have not led to definitive conclusions. In less than the theoretical "real

world", companies budget for future dividend payments in the same way that the

budget of any other cash outflows such as requirements for debt service, capital

expenditures, or any foreseeable demand for cash. As a result, when the Board

of Directors establishes the general dividend policy, often in the face and always

taking into account the projected cash flows - not earnings. Thus, domestic

politics in Russia can be described as a certain percentage of cash flow, even for

companies that have expressed their public policy in terms of relationships or the

payment of interest earnings

In the real world, the market can not be completely effective or completely

ineffective. Markets mainly a mixture of both, and daily decisions and actions

may not always be immediately reflected in the market, moreover, if all

participants had the view that the market is efficient, no one will look for those

additional revenues, the force that holds the wheel Market turn.

Semi-strong market efficiency, as indicated, Jack Treynor, believes that the

market will not always be either quick or accurate in processing new information.

On the other hand, it is not easy to convert to be able to trade profitably against

the market consensus in the superior performance of the portfolio.

Report to Board of Directors

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As part of major financial policy choices, dividend policy will have a

significant impact on our net income and cash flow. In this report, we will observe

the relationship between dividend policy and the Scottish Mitts PLC values

issues. The next report will focus on these topics:

1. Why dividend policy comes into focus?

2. What impact dividend policy on our market value?

3. What impact dividend policy on our financial performance?

4. What factors may affect the dividend policy?

5. How are we going to pay dividends?

* Key assumptions:

A. Effectiveness of the market, as a rule, semi-strong form

B. Subject Company is a productive high-tech company

C. The main purpose of the firm is to maximize shareholder value

D. The company has been operating in a stable financial growing periods,

and is expected to occur. Meanwhile, fixed borrowing company.

Shall We Pay Dividend

In the previous, our Scottish Mitts PLC is a stable tendency of growth in

profits. Statement of financial reports of certain amounts of retained earnings at

the end of each year. We will pay the undistributed profits as dividends or

reinvest in the expansion is now becoming a major component of our financial

portfolio decisions.

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If not enough investments that generate a positive NPV, it is time to return

cash to shareholders. Potentially, compelling reasons for paying dividends:

Customers Argument: There are shareholders who, as dividends, or

because they appreciate the regular cash payments or do not face tax deficiency.

If these shareholders in our PLC Scottish mittens, paying bigger dividends will

increase the cost

Dividends as signals: Because dividends require cash from the company,

we can understand why investors favor firms with established records dividends,

not only to profits earned in accounting people. Investors refuse to believe the

Scottish Mitts PLC reported earnings announcements, if they are not supported

with appropriate dividend policy

Transfer of Wealth: After returning more money to shareholders, may be the

transfer of wealth from bondholders to shareholders.

These provisions mean that our dividend policy can be used as a signal to

increase investor confidence in the future performance of PLC's Scotch Mitts.

Dividend Policy & Market Value

As we know, the market value of PLC’s Scotch Mitts presents value of all

future dividends. Despite the fact that we have higher and higher pay increases

the confidence of the market, but also leaves less retained earnings to finance

future growth. Thus, we must find a balance between this compromise, the

current income to shareholders (dividends) & the future growth of the company

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(retained earnings). The price of shares allegedly will be the maximum when the

market thinks management has found just the right balance.

Initiation of dividends or increase can only be welcomed as a sign of higher

future earnings. It is worth noting that investors do not worry about the level of

dividend PLC Scottish Mitts, they are concerned about the change, which is

regarded as a key indicator of sustainable earnings. For example, if we have

sufficient opportunities for profitable investment, but the limited available funds,

share price may increase at the expense of current dividends to increase

investment. If we lack such investment, the shareholder may be better if the

excess money paid to them in the form of higher dividends. In such situations,

the signal sent to the market about domestic investment opportunities and future

of any company as it pleased.

Dividend Policy & Cash Flow

Cash flow only "real" thing to the best of Scotland PLC Mitts fiscal health.

Cash dividends have an inevitable impact on cash flow, which can be called

"shock cash flow."

Because high dividend policy will be costly if we do not have sufficient cash

flow to support it, dividend increases signal our happiness & confidence in the

leadership of future cash flows.

We assume that the method used for the distribution of cash flows reflects

the nature of the underlying cash flow process and creates expectations of

investors about the volatility of cash flow shocks. The hypothesis consists of two

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parts. First, share repurchases to distribute cash flow shocks, which are mainly

transitional, and cash dividends contain more permanent component. Secondly,

the market recognizes this relationship and uses messages of a method of

distribution to update their ideas about the constancy of the past and the present

cash flow shocks.

Dividend policy & human factors

Typically, there are some legal considerations about the Scottish Mitts PLC

dividend policy, which applies to all listed companies:

Dividends may be paid out of profits and should not be paid out of capital.

Dividends can not be paid if it would make the company insolvent.

Dividends limitations may exist in the covenants in trust deeds and loan

agreements.

Under the charge, if the company is able to pay the income from

dividends, then, as a rule, it should do so.

In the previous part of this report, we have already mentioned some factors

that should be taken into account when creating our dividend policy, such as:

Clients consequences

Presence of retained earnings

Earnings volatility

Long-term goals

Investment opportunities

Cash flow requirements

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It should be noted that, in accordance with the modeling agency, the

primary motivation of dividends, that if the Scottish Mitts PLC profits paid out as

dividends, corporate managers may divert cash flows for personal use or to

unprofitable investment projects. Payment of dividends can be considered as a

means to reduce the free cash flow that managers can use discretion 15.

How do we Pay Dividend

Dividend varies with the general volatility of future cash flows, not only

systematic or market-based component of risk 16. After a review of listed

companies during the past 40 years showed:

Dividend

Revenues

Source: Damodaran, Aswath, 1999, cash back to owners: dividend policy,

Stern School of Business at New York University. http://pages.stern.nyu.edu/ ~

adamodar/pdfiles/ovhds/ch10.pdf

We assume that managers should be aware of the negative consequences

of high dividends, which cuts on stock prices. As a result, when managers

anticipate the uncertainty of future cash flows, they reduce the payment to avoid

the possibility to reduce dividends in the future.

When there is a change in dividend policy, it may be accompanied by a

significant event news on markets, when we try to reduce the dividend, it can

also be a significant bad news for the market. The proposal is that the general

trend is a smooth cash dividend over time, and, as a rule, we just declare a

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dividend when it is sustainable. The reason for smoothing the curve by solving

for the changes to bring good news to the market.

The stability of dividends can be achieved through the proliferation of

conventional year dividends for the year. In exceptionally good years, some

extraordinary dividends can be paid. Dividends are appointed Ambassador

Extraordinary to inform shareholders that the additional dividends should not be

expected every year in the future. However, ordinary dividends should rise in

step with earnings. Thus, the board of directors sets the dividend at some target

share of long-term average earnings.

Conclusion

Dividend Policy in the heart of corporate finance, especially when it comes

to pay great attention to cash flows PLC's Scotch Mitts.

Decide what percentage of the net profits for dividends is the main policy

choices to managers because it determines which funds flow to investors and

what tools are stored in the PLC Scottish Mitts for reinvestment.

We see that dividends and share price are positively correlated; this does

not mean that the former causes the latter. In the long run, higher dividends

should be supported by higher incomes and, consequently, above the Scottish

Mitts PLC value and shareholder wealth, but it does not follow that an increase in

dividends would lead to those things!

We have already seen that if Scots Mitts PLC investment and,

consequently, the prospects are held fixed-income, higher dividends actually help

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to reduce stock prices. If you take the higher dividends greater share of future

earnings, the stock price (which is the PV of these future revenues, which

retained) will fall.

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References

R.A.Brealey, S.C.Myers, 1988, Principles of Corporate Finance, 3rd edition,

McGraw, USA, pp357

M.H.Miller, F.Modigliani, “Dividend Policy, Growth and the Valuation of

Shares”, Journal of Business, 34: 411~ 433 (October 1961)

Klaus Spremann, Pascal Gantenbein, 2001, Theories and Determinants of

Dividend Policy, Stefan Beiner, pp3

M.J.Gordon, “Dividends, Earnings and Stock Prices”, Review of Economics

and Statistics, 41: 99~105 (May 1959)

B.Graham, D.L.Dodd, 1934, Security Analysis: The Classic 1934 Edition,

McGraw Hill, USA

Jack Treynor, "What Does It Take to Win the Trading Game?" Financial

Analysts Journal, January/February 1981

Resource: Aswath Damodaran, Returning Cash to the Owners: Dividend

Policy, http://pages.stern.nyu.edu/~adamodar/pdfiles/ovhds/ch10.pdf, Slide 28

R.A.Brealey, S.C.Myers, A.J.Marcus, 2001, Fundamentals of Corporate

Finance, 4th edition, McGraw, USA, pp437

R.A.Brealey, S.C.Myers, 1988, Principles of Corporate Finance, 3rd edition,

McGraw, USA, pp357

R.A.Brealey, S.C.Myers, A.J.Marcus, 2001, Fundamentals of Corporate

Finance, 4th edition, McGraw, USA, pp438

J.M.Stern, D.H.Chew, 1998, The Revolution in Corporate Finance, 3rd

edition, Blackwell, USA, pp144

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Wayne Guay, Jarrad Harford, 1999, The cash-flow permanence and

information content of dividend increases versus repurchases, Resource:

http://jfe.rochester.edu/99249.pdf

Resource: http://www.mcgraw-hill.com.au/mhhe/fin/peirson7e/stu/Chap-

12.ppt, slide 6

Jensen, Michael C., 1986, Agency Cost of Free Cash Flow, Corporate

Finance, and Takeovers, American Economic Review 76(2), pp.323-329.

Resource: http://www.umich.edu/~reecon/restate/faculty/div1197.pdf,

Dividend Policy and Cash Flow Uncertainty

http://www.departments.bucknell.edu/management/apfa/Hamburg

%20Papers/Frankfurter.pdf, G.M.Frankfurter, B.G.Wood, Dividend Policy

Theories and Their Empirical Tests

Resource: http://www.infotoday.org/business/finance1/class1.pdf

Resource: http://www.peoi.org/Courses/finanal/ch/ch12a2.html

Klaus Spremann, Pascal Gantenbein, 2001, Theories and Determinants of

Dividend Policy, Stefan Beiner, pp1

Resource: http://www.st-andrews.ac.uk/~gss2/ec3123/ec4423lecture1.pdf,

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Bibliography

Arnold G. (2008) Corporate Financial Management, 4th edition, FT Prentice

Hall

Brav A., Graham J.R, Harvey C.R., and Michaely R, (2005) ‘Payout Policy in the

21st Century’, Journal of Financial Economics 77 483 – 527.

Dong M., Robinson C, and Veld C, (2005) ‘Why individual investors want

dividends’, Journal of Corporate Finance 12 121 – 158.

Inappropriate sources (eg Wikipedia, Tutor4u etc) may result in marks being lost.

Please avoid using direct quotes.

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Appendix 1

Abridged Income Statement for the year ended 30th September:

All amounts are in thousands of pounds sterling

2009 2008 2007

Sales 9606 7564 6100

Cost of goods sold 4748 3755 2834

Gross Profit 4858 3809 3266

Selling Expenses 1467 1250 1080

Installation Expenses 1689 1300 980

Administration Expenses 1013 683 650

Operating Profit 689 576 556

Corporation Tax 249 194 168

Profit After Tax 440 382 388

Dividends 241 280 210

Retained earnings 199 102 178

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Balance Sheet at 30th September:

2009 2008 2007

Non-current assets (net):

Land & Buildings2300 2400 2500

Plant & Machinery 1700 1186 552

Fixtures & Fittings 700 600 402

Motor Vehicles 185 140 105

Office equipment250 185 100

5135 4511 3659

Current Assets:

Inventories: Raw Materials 216 208 182

Work in Progress 200 205 190

Finished Goods 150 128 97

Receivables 1176 839 595

Bank/Cash 181 66 104

1923 1446 1168

Current Liabilities:

Payables 1190 788 270

Corporation Tax 449 394 368

Final Dividend 171 140 110

1810 1322 748

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Net Current Assets 113 124 420

Net Assets 5248 4635 4079

Shares & reserves

£1 ordinary shares 1000 1000 1000

Profit & loss 4248 3635 3079

Shareholders’ funds 5248 4635 4079

Share price £2.25 £2.45 £1.75

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