Dividend Policy: Literature Review and Evaluation for a UK Listed Company

Learning outcomes and pass attainment level:

On completion of the course of study, students should be able to:

1.Understand  the role of dividend for firm and its share prices

2.Be able to evaluate literature and infer key conclusions

3.Be able to identify relevant data and evaluate the impact of dividend on share price and capital structure of firm

4.Be able to define merger and acquisitions and their benefits for key stake holders

Please ensure that all your calculations are supported by relevant workings.

Please attribute any references you make to published work of others using Harvard Referencing.

There are two questions in the assignment. You should attempt all of the questions and every part of each question. The word limit is 3,000 words.

When determining the amount of effort for each section of the assignment you should take notice of the mark allocation included in this pack.

Excellent work which demonstrates authoritative grasp of the concepts, methodology and content appropriate to the subject discipline. Indication of originality in the application of ideas, in synthesis of material or in performance; personal insights reflecting depth and confidence of understanding and real critical analysis. Work is well structured and presented with full referencing.

Very good work which demonstrates sound level of understanding based on a grasp of relevant concepts, methodology and content; displays skill in interpreting and analysing complex material. The material is well organised and referenced

Recognisable awareness of the requirements of the coursework. There is evidence of some understanding. It uses relevant source material and demonstrates some understanding of the concepts. There is an attempt to draw relevant conclusions.

Marginal fail. Unsatisfactory but showing some understanding. May be condonable is stronger performance on one aspect of the work compensates for weaker work elsewhere.

A poor attempt Little evidence of understanding or application.

Coursework Project

Dividend is an important conveyors of information about the company’s performance and future prospects.  Dividend policy often in textbook is described and commented on in the press, but seldom analysed in terms of its impact on cost of equity, financial risk, share prices (discounted or premium) and its impact on a company’s long-term investment strategy.

Information provided by the listed companies about their dividend policy are used by analysts and investors to develop investment strategies. However, no company will provide any analysis as to why a particular policy is best for the company or the shareholders.  Yet, investors and managers know that allocation of capital is crucial to a company’s survival and growth in an ever global and competitive environment. This realisation of the link between investment and earnings, calls for managers and owners to reflect on how earnings are most effectively used.

You are advised to select one of the top 250 UK listed companies of your choice for which you can easily access annual reports, especially information on dividend policy, share prices, and capital structure for a continuous period of not less than 11 years.  

Part 1

You are required to undertake literature review on “Dividend Policy”, paying particular attention to the following points:

a)Dividends as a residual

b)Signalling

c)Clientele preferences

Part 2.

Using financial data for the selected company, profit, dividend payment, share price, all share index and assume the current inflation rate is 3%; evaluate the current dividend policy of the company and discuss whether or not the company’s dividend policy has been successful.

Part 3.

Using Fisher-Hirshleifer model, examine firms’ investment decisions, owners’ consumption decisions in relation to the role of capital markets.

Write an essay of not more than 3000 words (marks will be deducted on a scale of 10% for every extra 100 words) on the dividend policy of the company, paying attention to the following:

Indicative contents

Part 1.

Critically review the points below

Over view of dividend theory

Significance and reason for following dividend residual pay out

How dividend serve the signalling purpose

Define and discuss Clientele preference concept and its uses

b)

Estimate growth in profit dividend

Estimate growth in share all index and consider share price

With supporting evidence from the estimated data discuss whether the Dividend policy has been successful

Use HL model to explain the operation of the separation theorem.  

Infer the relationship between capital markets and consumption decision

Relate the HL model with agency relationship