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Question 9.Act.1: Why do you think the law imposes limits on the amount that c...

Why do you think the law imposes limits on the amount that can be distributed as dividends?

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If there were no legal limits, shareholders could withdraw their investment from the business and leave lenders and other creditors in an exposed financial position. The law therefore seeks to prevent excessive withdrawals of shareholder capital. One way of doing this is to restrict the amount that can be distributed through dividend payments.

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Question: 9.1

Merton plc has the following statement of financial position as at 31 December Year 5:Suppose that the business decides to distribute all the cash available (that is, £30,000) to shareholders by making a 100p dividend per share. This will result in a fall in the value of assets to £60,000 (that is, ...

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Question: 9.Act.4

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Question: 9.2

Chang plc has 1 million shares in issue and surplus cash of £2 million, which is to be distributed to shareholders. Following this distribution, earnings are expected to be £1 million per year and the price/earnings ratio is expected to be 8 times. The distribution will be made by either: (i) a ...

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Question: 9.S-AQ.1

Sandarajan plc has recently obtained a listing on the Stock Exchange. The business operates a chain of supermarkets and was the subject of a management buyout five years ago. Since the buyout, the business has grown rapidly. The managers and a private equity firm owned 80 per cent of the shares ...

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Question: 9.RQ.1

Why should a business wish to buy back some of its shares? ...

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Question: 9.RQ.2

‘The business’s dividend decision is really a by-product of its capital investment decision.’ Discuss. ...

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Question: 9.RQ.3

Is it really important for a business to try to meet the needs of different types of shareholders when formulating its dividend policy? ...

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Question: 9.RQ.4

Describe how agency theory may help to explain the dividend policy of businesses. ...

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Question: 9.Act.2

Bio-tech Ltd, a private limited company, started trading in Year 1 and made a trading profit of £200,000 in this year. In Year 2, the business made a trading loss of £150,000 but made a profit on the sale of its office buildings of £30,000. Other non-current assets were revalued during the year, ...

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Question: 9.Act.3

Why might an increase in the dividend (D1) not lead to an increase in share price (P0)? (Hint: Think of the other variables in the equation.) ...

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