DIVIDEND/PAYOUT POLICY:

ANSWER ALL 4 PARTS PLEASE, AND GIVE DETAILED EXPLANATION OF EACH

Q1: a) Dividend irrelevance theory proposes that dividend policy should not impact on either shareholder value or company value. Using the extreme examples of either a re-investment of all earnings or a payment of all earnings to shareholders, explain this proposed theory. Consider also whether it will apply in practice. (10 marks)

b) Lintner proposes that dividend policy is influenced by the need to send a positive signal to investors. Describe how dividends should be determined, given this proposal. Discuss whether this is a realistic assessment of how the level of dividends actually is determined. Suggest some examples. (10 Marks)

c) The proposal that an increase in dividend payments may actually have a negative impact on company value is largely dependent on the effect of taxation. Explain this proposition. You may include a numerical example, if appropriate. (10 Marks)

d) The Dividend Irrelevance Hypothesis proposes that dividend policy will not impact on value, as companies can replace retained earnings with newly raised equity capital. Describe and explain this proposal. Conclude your answer with a critical assessment of this proposal.