F3 - 7. Dividend Policy

Question 1

What are the 3 options for use of excess funds?

Answer 1

1. Retain within business (fund future projects etc)
2. Return to shareholders as dividends
3. Share buybacks

Question 2

What are the 5 key considerations when setting dividend policy?

Answer 2

1. Shareholder wishes
2. Market perceptions
3. Availability of cash
4. Tax implications
5. Possibility of sustaining in the future

Question 3

What are the 3 most common dividend policies?

Answer 3

1. Growth year on year (sustainable, linked to inflation and profit growth)
2. Constant dividend payout % (can be volatile)
3. Zero dividend (invest in future)

Question 4

What is residual dividend theory?

Answer 4

Dividends are paid out only after all value enhancing projects are financed (but can be erratic)

Question 5

What is dividend irrelevancy theory?

Answer 5

Dividend decision does not affect total return, as if cash is invested into positive NPV projects then investors will see capital gain in the future

Question 6

What are the 2 main arguments for share buybacks?

Answer 6

1. Doesn’t lead to future dividend expectations
2. Fewer shares and consistent earnings lead to better EPS and share price

Question 7

What are the 2 main arguments against share buybacks?

Answer 7

1. Increased dividend seen as stronger confidence from the market
2. Only really benefit big institutions

Question 8

What is a scrip dividend?

Answer 8

Additional free shares instead of a cash dividend