1.Tesford PLC has estimated net cash flows from operations (after interest and taxation) for the next five years as follows:

YearNet cash flows ($)

13m

212m

35m

46m

55m

The cash flows have been calculated before the deduction of additional investment in fixed capital and working capital.This amounts to $2m in each of the first two years and $3m for each year thereafter.The firm currently has a cash balance of $500,000 which it intends to maintain to cope with unexpected events.There are 24 million shares in issue.The directors are committed to shareholder wealth maximisation.

Required:

A.Calculate the annual cash flows available for dividend payments and the dividend per share if the residual dividend policy was strictly adhered to.

B.If the directors chose to have a smooth dividend policy based on the maintainable regular dividend what would you suggest the dividends in each year should be?Include in your consideration the possibility of a special dividend or repurchase.

C.Explain why companies tend to follow the policy in b rather than a.