Diva Deluxe Limited is a private company which is considering a stock market floatation and associated listing. Currently, all profits after tax are distributed to the ordinary shareholders as cash dividends. (There are no preference shares.) The directors have been advised that they should consider a review of the existing dividend policy in the context of being a listed company. The directors have confessed to having no idea about what should be taken into consideration when developing a dividend policy. Additionally, whilst they are aware that there are a number of approaches to returning value to shareholders as dividends or alternatives, they are unaware of the details and implications of each approach.

Required:

a) For the directors, identify what should be taken into consideration when developing a dividend policy. Explain why the matters you identify should be taken into consideration.

b) For the directors, identify and explain the nature of TWO (2) alternatives to paying cash dividends. In so doing identify the implications for the company and its shareholders of using each of those alternatives.