Question 4 (20 marks) Read each of the following scenarios to answer the question that follows:

4.1 The chairman of the board of Lengana Ltd has announced that the company will change its dividend policy from the current stable amount policy to a residual dividend policy. That is, any cash flows left over after the firm has undertaken all profitable investments will be paid out to shareholders as dividends. The chairman is aware that the new policy will increase the variability of the dividends paid.

Required: Explain to the chairman whether the change in the companys dividend policy will affect the value of the firm. (10)

4.2 Shareholders invest in a company in the hope of receiving a return on their investment. This return largely takes the form of cash distributions and capital appreciation. Cash distributions can take the form of cash dividends (both normal and special) or share buybacks. Companies with excess cash can either pay a special dividend or buy back some of their issued shares. Share buybacks have become a popular cash distribution method for Johannesburg Stock Exchange (JSE)-listed companies, since their legalisation in 1999 (Wesson et al., 2019). In the last two years, companies such as MMI Holdings, Glencore, South32 and Datatec successfully completed share buyback programmes (Planting, 2020). Currently, Prosus, a Naspers subsidiary, plans to spend $5 billion (R82 billion) on buying back its own shares, as well as shares in Naspers, on the market (Business Insider, 2020). In 2018, AVI Ltd announced a special dividend of R2.50 per share; in effect, saying that the share price was too expensive to justify a share buyback (Planting, 2020).

Required: Discuss the reasons for the growth in popularity of share buybacks and the reasons against companies buying back their own shares. (10)