Pusher Ltd is a large company manufacturing hand-held electronic devices such as mobile phones and tablet computers. The company has been growing rapidly over the last few years, but it also has high research and development expenditure. It is involved in a number of projects worldwide, developing new and innovative products and systems in a rapidly changing industry. Due to the nature of the industry, this significant growth in earnings has never been stable, but has depended largely on the success of the new innovations and competitor actions. However, in the last two years it seems that the rapid period of growth is slowing, with fewer products coming to market compared to previous years. Pusher Ltd has never paid dividends and has financed projects through internally generated funds and with occasional rights issues of new share capital. It currently has insignificant levels of debt. The retained cash reserves have recently grown because of a drop in the level of investment in new projects. The company has an active treasury division which invests spare funds in traded equities, bonds and other financial instruments; and releases the funds when required for new projects. The division also manages cash flow risk using money and derivative markets. The treasury division is currently considering investing in three companies with the following profit after tax (PAT) and dividend history: Company Theta Company Omega Company Kappa

Company Theta Company Omega Company Kappa

Year PAT Dividends PAT Dividends PAT Dividends

$'000 $'000 $'000 $'000 $'000 $'000

2017 57,100 22,840 93,300 60,560 162,400 44,100

2016 54,400 21,760 90,600 57,680 141,500 34,200

2015 52,800 21,120 88,000 54,840 108,900 26,300

2014 48,200 19,280 85,400 52,230 105,700 20,250

2013 45,500 18,200 82,900 49,740 78,300 15,700

All of the three companies' share capital has remained largely unchanged since 20X3.

Recently, Pusher Ltd's Board of Directors (BoD) came under pressure from the company's larger shareholders to start returning some of the funds, currently retained by the company, back to the shareholders. The BoD thinks that the shareholders have a strong case to ask for repayments. However, it is unsure whether to pay a special, one-off large dividend from its dividend capacity and retained funds, followed by small annual dividend payments; or to undertake a periodic share buyback scheme over the next few years. Pusher Ltd is due to prepare its statement of profit or loss shortly and estimates that the annual sales revenue will beshs600 million, on which its profit before tax is expected to be 23% of sales revenue. It charges depreciation of 25% on a straight-line basis on its non-current assets ofshs220 million. It estimates thatshs67 million investment in current and non-current assets was spent during the year. It is due to receiveshs15 million in dividends from its subsidiary companies, on which annual tax of 20% on average has been paid. Pusher Ltd itself pays annual tax at 26%, and the tax authorities where Pusher Ltd is based charge tax on dividend remittances made by overseas subsidiary companies, but give full credit on tax already paid on those remittances. In order to fund the new policy of returning funds to shareholders, Pusher Ltd's BoD wants to increase the current estimated dividend capacity by 10%, by asking the overseas subsidiary companies for higher repatriations.

Required (a) Discuss Pusher Ltd's current dividend, financing and risk management policies, and suggest how the decision to return retained funds back to the shareholders will affect these policies. (4 marks)

(b) Evaluate the dividend policies of each of the three companies that Pusher Ltd is considering investing in, and discuss which company Pusher Ltd might select. (8 marks)

(d) Discuss the benefits to Pusher Ltd's shareholders of receiving repayments through a share buyback scheme as opposed to the dividend scheme described above. (3 marks)