Question
At a recent board of directors meeting of the Cotswold Train Company, a hypothetical company with stable cashflows and prospects, an argument took place between
At a recent board of directors meeting of the Cotswold Train Company, a hypothetical company with stable cashflows and prospects, an argument took place between the financial director, the marketing director and the chief executive officer (CEO) concerning the company's dividend policy. The CEO argued that no dividend is necessary in order to finance a number of highly positive NPV projects. The marketing director said that such a drastic dividend cut should not happen, as it would signal that the company was in trouble. The financial director said that when studying his M.Sc. in Finance he had learnt that dividend policy of a company was irrelevant. Some members of board of directors, which are also the shareholders of the company, added that issuing debt is a cheaper option to finance the positive NPV projects compared to financing the projects with dividends You are required to discuss these four alternative viewpoints and indicate which you favour.
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