Lecture 9

Question 1

The two views on dividends

Answer 1

Traditional - Shareholders would prefer £1 in dividends rather than £1 reinvested due to uncertainty

Modernist view - Argues that pattern of dividend payments has no effect on shareholder wealth

Question 2

MM assumptions

Answer 2

No share issue costs
No share transaction costs
No tax

Question 3

Reasons for the importance of dividends

Answer 3

Clientele effect - Shareholders seek out businesses whose dividend policies match with their needs
Information signalling - Dividends can be used to convey information (confidence)
Reducing agency costs - Agency theory views a business as a coalition of different interest groups

Question 4

Factors determining the level of dividends

Answer 4

Investment opportunities (retain if investments are profitable)
Financing opportunities (if there’s limited external finance)
Legal requirements - limited to protect creditors
As part of a loan commitment
Profit stability - stable = higher dividends
Fit in with other businesses

Question 5

Alternatives to cash dividends

Answer 5

Share dividends

Share buybacks