Dewey Cheatum and Howe is a 6-year-old company founded by David Dewey, Hunter Cheatum, and Jamie Howe to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. DCT's technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, the company has been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, DCT must now access outside equity capital to fund its growth, and the owners have decided to take the company public. Until now, the three owners have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Your new boss at the consulting firm Chicarelli WVU, which has been retained to help DCT prepare for its public offering, has asked you to make a presentation to the three owners in which you review the theory of dividend policy and discuss the following issues. (1) What is meant by the term "distribution policy"? How has the mix of dividend payouts and stock repurchases changed over time? 1 o (2) The terms "irrelevance," "dividend preference" (or "bird-in-the-hand"), and "tax effect" have been used to describe three major theories regarding the way dividend payouts affect a firm's value. Explain these terms, and briefly describe each theory. o (3) What do the three theories indicate regarding the actions management should take with respect to dividend payouts? O (4) What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts? 2. Discuss the effects on distribution policy consistent with: O O (1) the signaling hypothesis (also called information content hypothesis) and (2) the clientele effect. Dewey Cheatum and Howe is a 6-year-old company founded by David Dewey, Hunter Cheatum, and Jamie Howe to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. DCT's technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, the company has been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, DCT must now access outside equity capital to fund its growth, and the owners have decided to take the company public. Until now, the three owners have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Your new boss at the consulting firm Chicarelli WVU, which has been retained to help DCT prepare for its public offering, has asked you to make a presentation to the three owners in which you review the theory of dividend policy and discuss the following issues. (1) What is meant by the term "distribution policy"? How has the mix of dividend payouts and stock repurchases changed over time? 1 o (2) The terms "irrelevance," "dividend preference" (or "bird-in-the-hand"), and "tax effect" have been used to describe three major theories regarding the way dividend payouts affect a firm's value. Explain these terms, and briefly describe each theory. o (3) What do the three theories indicate regarding the actions management should take with respect to dividend payouts? O (4) What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts? 2. Discuss the effects on distribution policy consistent with: O O (1) the signaling hypothesis (also called information content hypothesis) and (2) the clientele effect
