The managing director of Lavipilon plc wishes to provide an extra return to the company’s shareholders and has suggested making either:

(i) a two-for-five bonus issue (capitalisation issue) in addition to the normal dividend;

(ii) a one-for-five scrip dividend instead of the normal cash dividend;

(iii) a one-for-one share (stock) split in addition to the normal dividend.

Summarised Balance Sheet (Statement of Financial Position)

of Lavipilon plc (end of last year)

Fixed assets 65 Current assets 130 Less: current liabilities (55)

Net current assets 75 Total assets less current liabilities 140 Less: Long-term liability 11% debenture (25)

Net assets 115 Capital and reserves:

Ordinary shares (50 pence par value) 25 Share premium account 50 Revenue reserves 40 Shareholders’ funds 115 The company’s shares are trading at 300p before the dividend is paid, and the company has £50 million of the (post-tax) profit from this year’s activities available to ordinary shareholders, of which £30 million will be paid as a dividend if options (i) or (iii) are chosen. None of the £40 million revenue reserves would be distributed. This year’s financial accounts have not yet been finalised.

(a) For each of the three proposals, show the likely effect on the company’s Balance Sheet at the end of this year, and the likely effect on the company’s share price.

(b) Comment on how well these suggestions fulfil the managing director’s objective of providing an extra return to the company’s shareholders.

(c) Discuss reasons why a company might wish to undertake:
(i) a scrip dividend;
(ii) a share (stock) split.
(ACCA)