UGB363: It is 31 January 2024 and the managers of Redsea are considering a change in the company’s dividend policy: Strategic Corporate Finance Assignment, USM, Malaysia

Part C

• It is 31 January 2024 and the managers of Redsea are considering a change in the company’s dividend policy. Earnings per share for 2023 for the company were 80p, and the finance director has said that he expects this to increase to 86p per share for 2024.
  

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The increase in earnings per share is in line with market expectations of the company’s performance. The pattern of recent dividends, which are paid on 31 December is as follows:

The managing director has proposed that 70 per cent of earnings in 2024 and subsequent years should be retained for investment in new product development. It is expected that, if this proposal is accepted, the dividend growth rate will be 8.5 per cent. Redsea’s cost of capital is estimated to be 10 per cent.

Required:

Calculate the share price of Redsea in the following circumstances.

1. The company decides not to change its current dividend (9 marks)
2. The company decides to change its dividend policy as proposed by the managing director and announces the change to the market. (6 marks)

Required:

• Does the dividend policy adopted by a company impact upon the market value of that company? Academic findings within this area have provided conflicting evidence with two distinct theoretical schools of thought; one supporting dividend relevance and the other dividend irrelevance. Critically analyse and evaluate the differing theoretical viewpoints, ensuring the response is developed through incorporating relevant academic research that has been performed within this area.

In this section students should demonstrate knowledge, understanding, and an ability to critically evaluate and analyse the main dividend relevance and irrelevance theoretical viewpoints. The response should be developed through use of a wide range of relevant academic literature, referenced as per Harvard referencing requirements. The inclusion and ability to integrate real-life practical business examples, addressing whether differing companies adopt a dividend relevance or irrelevance standpoint would assist in developing the response in greater depth.

Answer

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