Question 9.1: Merton plc has the following statement of financial position...
Merton plc has the following statement of financial position as at 31 December Year 5:
| Statement of financial position as at 31 December Year 5 | |
| £000 | |
| Assets at market value (exc. cash) | 60 |
| Cash | \underline{30} |
| Total assets | \underline{90} |
| Ordinary (equity) share capital (30,000 shares) plus reserves | \underline{90} |
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, £90,000 − £30,000) and a fall in the value of its shares from £3 (that is, £90,000/30,000) to £2 (that is, £60,000/30,000).
The statement of financial position following the dividend payment will therefore be as follows:
| Statement of financial position following the dividend payment | |
| £000 | |
| Assets at market value (exc. cash) | 60 |
| Cash | \underline{-} |
| Total assets | \underline{60} |
| Ordinary (equity) share capital (30,000 shares) plus reserves | \underline{60} |
Before the dividend distribution, a shareholder holding 10 per cent of the shares in Merton plc will have:
| £ | |
| 3,000 shares at £3 per share | 9,000 |
Following the distribution, the shareholder will have:
| £ | |
| 3,000 shares at £2 per share | 6,000 |
| plus a cash dividend of 3,000 × £1.00 | \underline{3,000} |
| \underline{9,000} | |
In other words, the total wealth of the shareholder remains the same.
If the shareholder did not want to receive the dividends, the cash received could be sed to purchase more shares in the business. Although the number of shares held by the shareholder will change as a result of this decision, his or her total wealth will remain the same. If, however, Merton plc did not issue a dividend and the shareholder wished to receive one, he or she could create the desired dividend by simply selling a portion of the shares held. Once again, this will change the number of shares held by the shareholder but will not change the total amount of wealth held.