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.
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
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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