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Calculate the following measures for three years:

1. Capital structure (i.e., the percentage of debt and percentage of equity)
2. Cost of common equity and (if any) preferred equity
3. Sources of debt (i.e., bank loans and/or bonds)
4. Before-tax and after-tax cost of debt
5. Weighted average cost of capital

1. Report the dividend payments over the last three years
2. Calculate the dividend payout and dividend yield
3. Identify a dividend payout policy that the company follows
4. Comment whether the dividend payment of the company is providing a signal to the market
5. Evaluate the dividend policy of this company in terms of the industry practice

Question 1 Capital Structure

 Particulars Details Bendigo and Adelaide Bank 2015 (in million \$) 2016 (in million \$) 2017 (in million \$) Total debt A 7,249.10 5,958.70 6,741.10 Total equity B 4,941.70 5,115.30 5,425.80 Total debt and equity C=A+B 12,190.80 11,074.00 12,166.90 Percentage of debt A/C 59.46% 53.81% 55.41% Percentage of equity B/C 40.54% 46.19% 44.59%

Table 1: Capital structure of Bendigo and Adelaide Bank for the years 2015-2017

For determining the capital structure of Bendigo and Adelaide Bank, the total debt and total equity have been taken into consideration. The items that have been taken into account for computing the overall debt of the bank include notes payable, derivatives, provisions, other payables, convertible preference shares and subordinated debt. The equity items considered are share capital, reserves and retained earnings (Danis, Rettl & Whited, 2014). For computing the percentage of debt, the overall debt amount is divided by the overall amount of debt and equity. The similar process is followed in case of calculating the percentage of equity.

According to the above table, it could be observed that the debt percentage of the bank has declined from 59.46% in 2015 to 53.81% in 2016; however, it has increased to 55.41% in 2017. On the other hand, the equity percentage of the bank has increased from 40.54% in 2015 to 46.19% in 2016; however, it has declined to 44.59% in 2017. Thus, it could be inferred that Bendigo and Adelaide Bank relies more on debt funding rather than equity financing for conducting its business activities and operations.

 Computation of Cost of Equity: Particulars 2015 2016 2017 Risk-free rate 2.10% 2.10% 2.10% Market return -0.43% 9.96% 14.47% Beta 0.29 1.48 0.51 Cost of equity 1.36% 13.70% 8.37%

Table 2: Cost of equity of Bendigo and Adelaide Bank for the years 2015-2017

For computing the cost of equity of the bank, the risk-free rate, market return, stock return and Beta have been taken into consideration. The market return, stock return and Beta have been computed, which are presented in the form of tables (Refer to Appendices, Appendix 1, Appendix 2 and Appendix 3).  According to the above table, it could be stated that the cost of equity of Bendigo and Adelaide Bank has increased heavily from 1.36% in 2015 to 13.70% in 2016; however, it has fallen to 8.37% in 2017. In this context, DeAngelo & Stulz (2015) stated that the cost of equity is the return that an organisation needs to determine if an investment fulfils the capital return needs. The cost of equity trend of the bank clearly implies that the equity holders of the bank are expected to earn greater returns; however, it has been lower compared to 2016.

The main sources of debt for the bank include the bonds, notes, debenture and commercial papers, which the bank has issued within the group. In addition, the sources of debt constitute of the acceptances, which are the bills of exchange accepted in the initial stage and then the bank has discounted the same subsequently for rediscounting in the market (Faccio & Xu, 2015). Furthermore, the bill financing and discount of the bills of exchange are taken into account as portion of borrowings.

In the words of Al-Najjar et al., (2016), the cost of debt is the rate of return that is needed on the part of debt holders of an organisation. In this case, the coupon rate on bonds for Bendigo and Adelaide Bank is 5%. Therefore, the before-tax cost of debt is 5%, since it is the same as coupon rate on bonds. For calculating the after-tax cost of debt, before-tax cost of debt and the tax rate are taken into consideration. The standard tax rate in Australia is 30%, if the annual turnover of the organisation is above \$2 million (Jacob, Michaely & Alstadsæter, 2014). In this case, the annual turnover of Bendigo and Adelaide Bank has been above \$2 million from 2015 to 2017. Thus, the standard tax rate applicable for the bank would be 30%. The after-tax cost of debt for the bank is computed as follows:

Question 2 Dividend Policy

 Particulars Details Units Before-tax cost of debt A 5% Tax rate B 30% After-tax cost of debt A*(1-B) 3.50%

Table 3: After-tax cost of debt for Bendigo and Adelaide Bank

 Computation of Weighted Average Cost of Capital: Particulars Details 2015 2016 2017 Market value of debt D 7,249.10 5,958.70 6,741.10 Market value of equity E 4,941.70 5,115.30 5,425.80 Total market value V=E+D 12,190.80 11,074.00 12,166.90 Cost of equity Re 1.36% 13.70% 8.37% Cost of debt Rd 3.50% 3.50% 3.50% Tax rate T 30% 30% 30% Weighted average cost of capital (E/V*Re)+[(D/V*Rd)*(1-T)] 2.01% 7.65% 5.09%

Table 4: Weighted average cost of capital of Bendigo and Adelaide Bank for the years 2015-2017

 Particulars 2015 (in \$) 2016 (in \$) 2017 (in \$) Dividend per share 0.68 0.68 0.68

Table 5: Dividend per share of Bendigo and Adelaide Bank for the years 2015-2017

According to the above table, it could be stated that the dividend per share of the bank has remained constant at \$0.68 over the three-year period. In this context, Belo, Collin?Dufresne & Goldstein (2015) stated that the bank has provided the same amount of dividend per share to its shareholders regardless of the annual turnover. It has been observed that the bank has experienced fall in annual turnover from 2015-2017; however, it has managed to maintain the same rate of dividend distribution over the specified timeframe to its shareholders. Hence, it could be inferred that Bendigo and Adelaide Bank has focused on maintaining the interests as well as maximising the wealth of the shareholders (Thanatawee, 2014).

 Particulars Details 2015 2016 2017 Dividend A 247.8 237.9 217.3 Dividend per share B 0.68 0.68 0.68 Net profit C 423.9 415.6 429.6 Market price per share D 12.82 8.56 12.22 Dividend payout ratio A/C 58.46% 57.24% 50.58% Dividend yield ratio B/D 5.30% 7.94% 5.56%

Table 6: Dividend payout ratio and dividend yield ratio of Bendigo and Adelaide Bank for the years 2015-2017

The shareholders of Bendigo and Adelaide Bank have the alternative of receiving dividend in the form of cash or they could reinvest the same for the same number of shares under the “Dividend Reinvestment Plan (DRP)”. The board is involved in issuing new shares to fulfil the DRP in order to pay the final dividend. However, the DRP of the bank does not take into account the discount (Kajola, Adewumi & Oworu, 2015). In addition, the board takes into account the different factors constituting of the influence of bank levy on the shareholders, which is 2% per share. The directors need to invest the dividends, which are paid and unclaimed in order to benefit the bank. This process goes on until the claim is made or it is needed to be dealt in accordance with the law related to the unclaimed amounts.

The dividends primarily depict the financial strength. It denotes that the bank is highly confident about the generation of adequate free cash flow in future for returning to the shareholders of the bank. The dividend payment is a symbol of the activist shareholder base, which needs the return on investment (Kester et al., 2016). Along with this, the payment of fixed and regular dividend represents that the bank is mature with continent sales and gains. On the other hand, suspension or minimisation in payment of regular dividend is the depiction for financial downfall and problems in cash flows (Jiranyakul & Jiang, 2013). In case of Bendigo and Adelaide Bank, the dividend payment is regular and fixed, which denotes that the shareholders of the organisation could expect stable returns in future.

The dividend payout ratio in the banking industry of Australia is greater in contrast to the other industries of the nation. The shareholders normally own the banks and they are benefitted from gains remaining after the payment of tax. The banks give away a huge portion of their profits earned in the form of dividends (Rampini & Viswanathan, 2013). The dividend payout ratio of the banking industry of Australia varies between 69% and 83%. On the other hand, the ratio for Bendigo and Adelaide Bank has been 58.46%, 57.24% and 50.58% in the years 2015, 2016 and 2017 respectively. In this case, it could be observed that the bank has minimised its dividend payment to the shareholders, which denotes that its dividend policy is not consistent with the industrial practice of the banking sector of Australia. However, it has managed to maintain the same dividend per share despite the fall in annual turnover, which depicts sound financial condition of the bank in the Australian banking industry.

References:

Al-Najjar, B., Al-Najjar, B., Kilincarslan, E., & Kilincarslan, E. (2016). The effect of ownership structure on dividend policy: Evidence from Turkey. Corporate Governance: The international journal of business in society, 16(1), 135-161.

Belo, F., Collin?Dufresne, P I. E. R. R. E., & Goldstein, R. S. (2015). Dividend dynamics and the term structure of dividend strips. The Journal of Finance, 70(3), 1115-1160.

Danis, A., Rettl, D. A., & Whited, T. M. (2014). Refinancing, profitability, and capital structure. Journal of Financial Economics, 114(3), 424-443.

DeAngelo, H., & Stulz, R. M. (2015). Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics, 116(2), 219-236.

Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), 277-300.

Jacob, M., Michaely, R., & Alstadsæter, A. (2014). Taxation and dividend policy: The muting effect of diverse ownership structure. In Working Paper.

Jiranyakul, K., & Jiang, J. (2013). Capital structure, cost of debt and dividend payout of firms in New York and Shanghai stock exchanges.

Kajola, S. O., Adewumi, A. A., & Oworu, O. O. (2015). Dividend pay-out policy and firm financial performance: evidence from Nigerian listed non-financial firms. International Journal of Economics, Commerce and Management, 1-12.

Kester, G. W., Chang, R. P., Echanis, E. S., & Soedigno, S. (2016). Dividend and capital structure policy in Indonesia and the Philippines: the views of executives of listed firms. Philippine Management Review, 6(1).

Rampini, A. A., & Viswanathan, S. (2013). Collateral and capital structure. Journal of Financial Economics, 109(2), 466-492.

Thanatawee, Y. (2014). Ownership structure and dividend policy: Evidence from China.

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