The managing director has proposed that 60 percent of earnings in 2023 and subsequent years should be retained for investment in research and development. It is expected that, if this proposal is accepted, the dividend growth rate will be 9 percent. XYZ’s cost of capital is estimated to be 11.5 percent.
Calculate the share price of XYZ in the following circumstances.
The company decided not to change its current dividend policy. (9 marks)
The company decides to change its dividend policy as proposed by the managing director and announces the change to the market. (6 marks)
(Alan’s guidelines: Please make reference to the calculation exercise in class)
Is dividend policy relevant to shareholder value? There are two camps among the academics on this question, and empirical findings have provided conflicting evidence on whether dividend policy matters or not. Critically analyze and evaluate the differing theoretical viewpoints, ensuring the response is supported by relevant academic research in this area. (35 marks)
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