ACCA P4 Advanced financial management Essential text by Kaplan

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However following recent management changes and a company restructuring, the company is earning good profits and the directors are looking to formalise the future dividend policy at a forthcoming board meeting. Particular concerns have been expressed by some directors: • Director X has referred to the need to provide investors with stability, not reduce dividends and only increase them when it is clear that the increase can be maintained.  The director believes that the dividend payout should therefore be as high as possible, with the company borrowing to pay them if necessary.

But constraints might include: • Getting approval by general meeting (arguments about the price at which repurchase is to take place). • The company may pay too high a price for the shares. KAPLAN PUBLISHING 45 Dividend policy 46 • The shareholders may feel they have received too small a price for their shares. • Premiums paid are set first against share premium and then against distributable profits (if against distributable profits, this will reduce future dividend capacity). • Might be seen as a failure of the current management/company to make better use of the funds through reinvesting them in the business.

Changes in dividend policy, particularly reductions, may conflict with investor liquidity requirements (selling shares to ‘manufacture dividends’ is not a costless alternative to being paid the dividend). g.  Companies may have attracted a certain clientele of shareholders precisely because of their preference between income and growth. As a result, most companies prefer to predetermine dividend policy. Expandable text 40 KAPLAN PUBLISHING chapter 3 Test your understanding 1 What pattern of dividend payments would be recommended in a perfect capital market?

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