Traminer plc provides software solutions for the airline industry. At present, shares in the business are held

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Traminer plc provides software solutions for the airline industry. At present, shares in the business are held by the senior managers and by a venture capital business. However, Traminer plc intends to seek a Stock Exchange listing and to make 75 per cent of the ordinary shares available to the investing public. The board of directors recently met to decide upon a dividend policy for the business once it has become listed. However, the meeting ended without agreement.

The chairman argued that the existing dividend policy need not be changed whereas the chief executive argued that it should be changed. The operations director expressed the view that, as the pattern of dividends had no effect on the shareholders’ wealth, the debate was irrelevant.

Information relating to the business over the past five years is set out below:

Year ended Ordinary shares Profit for the year Ordinary share 30 April in issue dividends 000 £000 £000 2004 500 840 420 2005 500 1,190 580 2006 800 1,420 340 2007 1,000 1,940 450 2008 1,000 2,560 970 Required:

(a) Explain the rationale for the view expressed by the operations director.

(b) Evaluate the rationale explained in

(a) above and include in your evaluation two reasons why, in practice, managers consider the pattern of dividends to be important to shareholders.

(c) Evaluate the dividend policy pursued by Traminer plc over the past five years and comment on the points expressed by the chairman and the chief executive.

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