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

b) 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

c) 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.

d) Critically discuss how the company's decision will be influenced by the

opportunity to invest 70m in a project with a positive net present value.

Total