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Question B2 Tropical plc is a company that manufactures luxury goods for several well-known chain stores. The dividend policy of the company is to maintain
Question B2 Tropical plc is a company that manufactures luxury goods for several well-known chain stores. The dividend policy of the company is to maintain a constant payout ratio of 30% of profits after tax. At a recent board meeting, the directors were reviewing and deliberating about the dividend policy. The following views were expressed by three directors at the board meeting: Director A: "We should have a constant dividend growth policy with some growth rates, irrespective of whether profits after tax rise or fall. If we have surplus cash after reinvestment we can leave it in the bank." Director B: "I agree with Director A, but instead of leaving surplus cash in the bank we can pay a special dividend." Director C: "I believe that maintaining dividend payments at an unsustainably high level can be detrimental to the company in the long-run. We should consider dividend cuts in order to preserve our capital position to bolster the company's capacity to withstand future economic challenges." Required: Critically evaluate the specific points made by each of the three directors and explain how Tropical plc might address the fact that different groups of investors may have different preferences in respect of dividends. (Word limit: maximum 600 words) Total 30 Marks Appendix A: Present value of 1 after n years = 1(1+k)" % 6% 8% 10% 1% 2% 12% 14% 15% 16% Years hence 1 2 3 0.990 0.980 0.971 0.961 0.951 0.942 4 5 6 7 0.933 0.923 8 9 10 11 12 13 14 0.914 0.905 0.898 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820 0.980 0.961 0.942 0.924 0.908 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 0.962 0.925 0.889 0.855 0.822 0.790 0.780 0.731 0.703 0.678 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 0.943 0.890 0.840 0.792 0.747 0.705 0.865 0.627 0.592 0.558 0.527 0.497 0.469 0.442 0.417 0.394 0.371 0.350 0.331 0.312 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 0.893 0.797 0.712 0.638 0.567 0.507 0.452 0.404 0.381 0.322 0.287 0.257 0.229 0.206 0.183 0.163 0.146 0.130 0.116 0.104 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0,095 0.083 0.073 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.215 0.187 0.163 0.141 0.123 0.107 0.093 0.081 0.070 0.061 0.862 0.743 0.641 0.552 0.478 0.410 0.354 0.305 0.263 0.227 0.195 0.168 0.145 0.125 0.108 0.093 0.080 0.069 0.060 0.051 15 16 17 18 19 20
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