Integrated Waveguide Technologies, Inc. (IWT) is a 6-year-old company founded by Hunt

Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and

manufacture miniature microwave frequency directional transmitters and receivers for use

in mobile Internet and communications applications. IWTs 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, Jackson and Smithfield have 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, IWT must now access outside equity capital to fund its growth, and Jackson

and Smithfield have decided to take the company public. Until now, Jackson and Smithfield

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 Flick and Associates, which has been retained to help

IWT prepare for its public offering, has asked you to make a presentation to Jackson and

Smithfield in which you review the theory of dividend policy and discuss the following issues.

a. (1) What is meant by the term distribution policy? How has the mix of dividend

payouts and stock repurchases changed over time?

(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 firms value. Explain these terms, and briefly describe

each theory.

(3) What do the three theories indicate regarding the actions management should take

with respect to dividend payouts?

(4) What results have empirical studies of the dividend theories produced? How does

all this affect what we can tell managers about dividend payouts?

b. Discuss (1) the information content, or signaling, hypothesis, (2) the clientele effect,

and (3) their effects on distribution policy.