Dividend Policy Essay

Introduction Refer to Figure 1. Would you say that Montgomerys insurance up to now has been to pay a constant dividend, with occasional summations as the company grows?Montgomery has maintained the dividend polity of paying a unfaltering dividend to their stakeholders. This steady dividend policy increases every(prenominal) time the firm produces. Since 200, the amount connected to paying dividends has grown each twelvemonth, but particular emphasis has been located on the figures that show dividends paying on every shargon. In 2000, they paying$1. 36, 2001 they paid $1.48, 2002 they paid $ 1.70, 2003 and 2004 the firm paid $1.76 each socio-economic class, and in 2005 it paid dividend per share of $ 1.96 showing a steady increase over the vi years. The top-level management has been confident about the constant or slight yearbook increase of the DPS because of the yearly rise in the over all number of shares every year since 2000 (Baker, 2009). Refer to Figure 2. What type of dividend policies would you say are existence practiced by Montgomerys competitors in the retailing fabrication? Do you venture that any firms are following a difference policy?J.C. Penney1999 2000 2001 2002 2003 2004 2005EPS $2.75 $2.94 $3.13 $2.91 $2.66 $3.53 $4.70DPS $0.92 $1.00 $1.08 $1.18 $1.18 $1.24 $1.48Payout balance 33.5% 34.0% 34.5% 40.6% 44.4% 35.1% 31.5%Dollar General1999 2000 2001 2002 2003 2004 2005EPS $0.38 $0.61 $0.81 $1.10 $0.95 $0.23 $0.30DPS $0.09 $0.11 $0.13 $0.17 $0.20 $0.20 $0.20Payout Ratio 23.7% 18% 16.1% 15.5% 21.1% 87.0% 66.7%Wal-Mart Stores1999 2000 2001 2002 2003 2004 2005EPS $0.16 $0.23 $0.35 $0.48 $0.58 $0.80 $1.10DPS $0.02 $0.02 $0.04 $0.05 $0.07 $0.09 $0.12Payout Ratio 12.5% 8.7% 11.4% 10.4% 12.1% 11.3% 10.9%The main competitors that Montgomery has been competing with are Wal- mart, J.C Penney, and Dollar General. The two firms are exploitation the same policy employ by Montgomery as they turn over to increase their dividend per share each year. In 2004, disdain Earnings per share, step-down by over 75% the dividend per share was held at $0.20. The dollar change magnitude their profits by more than 17% despite the EPS decreasing by 14%.It is clear that a growth and stable dividend are deprecative detailors considered by any growing retail company. We empathize that Wal-Mart, which is the biggest retail industry, to a fault ignores emphasizing on crownwork growth as they go for stableness in dividend and growth. The same case applies to J.C Penney, who maintains a stable dividend per share despite fluctuations in EPS. Montgomery has the highest average payout ratio compared to even Wal-Mart because of the long stoppage they have been in the industry and with the same dividend policy, their DPS increase every year (Baker, 2009). psyche TwoCalculate the expected run off to the common expressholders below the firms present policy, given an expected divid end next year of $2.10 and a growth rate of 7.1 percent. Montgomerys stock presently sells for $35.(Use the dividend growth model) Expected pass on (Ke) = D1 / P0 + gD1 = $2.10,g = 7.1%,P0 = $35, Ke,Expected return to stockholder = $2.10/$35 + 7.1% = 6+ 7.1 = 13.1%Assume that, if founding father Jacksons proposal were adopted, next years dividend would be zero, but shekels growth would rise to 14 percent. What will be the expected return to the stockholders (assuming the other factors are held constant)?Adopting acquires suggestion will see the Stockholders pee-pee no dividend at all, but the growth will increase by 14% with an expected return remaining the same as the growth rate.Expected Return to Stock holders= 0/$35+ 14% = 14%.Dons suggestion will see the stakeholders have a go at it an additional 0.9% on their expected return, thus the need to see the advantages of Dons policy. in that respectfore, the firm cannot completely ignore the idea of changing to a respite div idend policy. On the other hand, the same stockholders will except hit a 14% gain by selling their shares yet the certain dividend policy earns them a 13.1%. Since there are no advantages enjoyed by detonating device gain as a result of breathing legislation, then it could be wise for the Company to maintain the dividend policy they are exploitation. This is because the shareholders could only proceeds from residual dividend policy if the firm grew to 14% a fact that is only speculation. If the growth fall below13. 1% then the on-going system is suave the best (Baker &Filbeck, 2012).Question threeDons suggestion supports the fact that dividend and capital work out should be paid from the current years net income, a case that is untrue. This happens because the firm is world limited by the change they are holding. The companys balance in 2005 was $3,235,000 being the maximum amount that can be paid to the capital budget together with a dividend without having to outsource for funds or sell its existing assets. Paying dividends from retained earnings will force firms to sell their piazza since they are not hard cash (Baker &Filbeck, 2012).Question fourDon says the cost of the outside financing is more expensive than the cost of indispensable financing, due to the flotation costs charged by investment bankers. disposed(p) the data you have, what would you say is the firms cost of internal loveliness financing?The cost of borrowing from outside sources will only be higher because of costs incurred during flotation.Assume Montgomery can sell bonds priced to restoration 13 percent. What is the firms after-tax cost of debt? (The tax rate is 25 percent.Bonds yield=13%. Therefore, after tax cost = 13%, reproduce by (1-0.25) = 9.75%.Given the cost of debt and the cost of internal equity financing, wherefore doesnt Montgomery just borrow the total amount infallible to fund the capital budget and the dividend as rise.Borrowing money for capital budget and dividend will affect the debt-equity, causing it to be out of simile as it will increase the cost of financing of debts as well as the costs of all other financial means (Baker &Filbeck, 2012).Question fiveDo you go along with Clarence Autrys comment that it is what the stockholders call for that counts, not their total rate of return? Why or why not?Mr. Autry is against the residual dividend policy. This means that the shareholders will not have a say or tasting on the type of repayment they fit for investing in Montgomery as long as they earn the highest returns. If they are given the opportunity to choose, they will not go for that policy. There are no rules for determining whether shareholders can have a preference or how much they will benefit from it, thus making the trim very controversial. But the retailing industry as shown in the figures preceding(prenominal) for Wal-mart, J C Penney and dollar, they give shareholders a preference which is taking the current div idend paid rather than investing the cash in more sweet investments (Baker &Filbeck, 2012).Question sixBarbara Reynolds suggests that, if cash is needed for the capital budget, a stock dividend could be substituted for a cash dividend. Do you agree? How do you think the stockholders would react? Regardless of their reaction, is the stock dividend an equivalent substitute for a cash dividend?As much as the firm is in a moorage to pay share dividend and not cash dividend, not all stockholders will be comfortable for some will feel that nothing was very paid to them. This is so because the share dividend is just but a spotless paper which the shareholders sign to create more shares. This could only become adept if it increased the shareholders total cash dividend which will go into the role of a stock dividend to conserve funds (Baker, 2009).Question sevenAfter all is said and done, do you think the firms dividend policy matters? If so, what do you think Montgomerys policy should be.Whether going for residual dividend policy or payment of a cash dividend, every financial psychoanalyst has his or her views. Many would argue that borrowing to invest rather than using the available money would increase costs due to flotation that are associated with borrowing from outside sources hence need to go for a residual dividend policy. On the other hand, Montgomery being an old firm that is used to the current dividend policy will be better off viscid to it. Consequently, leave residual dividend policy for new emerging retail companies (Baker, 2009).ReferencesBaker, K. (2009). Dividends and Dividend policy. eighth edition, Harvard Business School Press New York.Baker, K. & Filbeck, G. (2012). Alternative investments Instruments, Performance, Benchmark and Strategies.second edition, Harvard Business School Press New York.