It is 31 January 2019 and the managers of Primrose are considering a change in the company's dividend policy. Earnings per share for 2018 for the company were 68p, and the finance director has said that he expects this to increase to 72p per share for 2019. The increase in earnings per share is in line with market expectations of the company's performance. The pattern of recent dividends, which are paid on 31 December is as follows:

Year 2018 2017 2016 2015 2014 2013

Dividend per Share (pence)

40.8

39.6

39.2

38.6

38.4

37.9

The managing director has proposed that 70 per cent of earnings in 2018 and subsequent years should be retained for investment in new product development. It is expected that, if this proposal is accepted, the dividend growth rate will be 3.50 per cent. Primrose's cost of capital is estimated to be 5 per cent.

Required:

Calculate the share price of Primrose in the following circumstances.

a) The company decides not to change its current dividend policy.(9 marks) b) The company decides to change its dividend policy as proposed by the managing director and announces the change to the market.(6 marks)

Required:

(b). The question of the effect of dividends on share prices has been a controversial one for many years. Two differing theoretical schools of thought are prevalent within this area, one supporting dividend relevance, and the other providing support for dividend irrelevance. Critically evaluate the two schools of thought; ensuring the evaluation is developed with relevant academic evidence.(35 marks)

In this section students should demonstrate both understanding and knowledge of the dividend relevance and irrelevance theoretical viewpoints. The discussion / evaluation should be supported with relevant empirical research that has been performed within this area and should be referenced accordingly. The inclusion and ability to integrate real-life practical business examples, addressing whether differing companies adopt a dividend relevance or irrelevance standpoint would assist in developing the response in greater depth and detail.