The Finance Managers' Decisions on Payout and Capital Structure Policies
1)Please be kind to read below my personal requirement for the essay :
- The essay itself ( Without Reference List ) must be NO less than 3000 Words. So reference list is not included in the 3000 word count.
-Please write the essay in a very simple and direct way , so when I will receive it I can understand its content , and if needed I can do some edit. If the assignment is too technical or complex, I cannot understand it and I cannot edit it, as I am not an expert in the field.
-Please make the assignment also argumentative , do not just write symbols or calculation, but please explain with words and try to argument end to explain the calculations that have been done, so I can also understand what are these calculations for and their meaning.
-Please do not use High Technical language otherwise that can make someone suspicious, but please use simple language to describe the topics.
-Please provide my assessment in WORD document and NOT IN PDF.
-Please use reliable references which I can put into the essay and for which I will not be marked down. You can use also a company website, or a reliable and famous financial website as reference, that will make my life easier when I ll need to edit it. ( If you'll put academic references from book, and you do not write then in the way my College wants , then I ll have to edit it, but it will be hard to edit it as I ll probably will not have all information to reference the way they want), so please use company website or financial official website, so I can easily access to them and check them.
-Please write the assignment in the following structure and in the following order : 1) Introduction 2)Body 3) Conclusion 4) References List
- Please be aware that my university portal uses Turnitin for detecting plagiarism so please be very careful when writing things which comes from other sources , as Turnitin will immediately detect them and if it will find some similarity they will make me fail the assignment immediately. That's why I would like the assignment to be quite personal and argumentative.
- Please always use third person for the assignment and never write in the first person
2 ) Now that you have my personal requirements for the assignment , I will write below the assessment question :
The final assessment is worth 50% of your final mark and is 3000 words (plus or minus 10%). The assessment consists of a written report and reflective practice activity. Ensure you read the following brief and instructions thoroughly.
Written report
Two of the most important ongoing activities for any finance manager in any company are investment and financing decisions. Finance managers are generally faced with the following decisions:
1. Payout policy – what proportion of funds generated internally should be retained in the business, and how much should be paid out to shareholders in the form of a dividend or share repurchase?
Because of the financial crisis and global economic slowdown, many companies choose to repurchase stock shares and pay cash dividends to attract investors. In addition, many investors are more willing to invest in firms paying cash dividends. The companies paying cash dividends generally do so due to its higher profitability, market book value, and faster growth rate of assets. Meanwhile, investors may thus believe that this firm will be likely to have a profit. However, the firm’s future profitability information content of share repurchase only exists when the share repurchase is a moderate amount. Meanwhile, cash dividends convey the message of profitability, which echo with information content theory, and have an impact on the company's future earnings.
Required:
a) A poor dividend policy could reduce shareholder wealth. Theoretically what are some of the arguments in favour of paying dividends?
b) Different tax regimes on dividends and capital gains across jurisdictions could affect corporate dividend-payout policy. Comment on this statement, giving special attention to its appropriateness in the Australian tax environment.
c) Evaluate the dividend payout policy of a listed company of your choice. Evaluate the company’s current payout policy and identify the reasons for this decision.
2. Capital structure policy — should the company use debt or equity financing or a portion of both, and if so, how much?
The capital structure of the firm influences its profitability. Debt is a liability on which interest should be paid irrespective of the company’s profits, while equity consists of shareholders (or owners) funds on which payment of dividend depends upon the company’s profits. A high proportion of debt content in the capital structure increases the risk and may lead to financial insolvency in adverse times. However, raising funds through debt is cheaper in comparison to raising funds through shares. This is because interest on debt is allowed as an expense for tax purposes. Dividend is an appropriation of profits; hence, payment of dividend does not result in any tax benefit to the company.
Critically evaluate the following statements:
It is obvious that companies should use as much debt as possible. It is cheaper than equity and the interest rate is tax deductible as well.
The probability of financial distress should be negligible for companies with a low proportion of debt. Therefore, a low proportion of debt should not have any noticeable effect on the cost of equity.
Describe and evaluate the capital structure policy of the listed company chosen for part c) above.
Reflective practice activity
How you manage, spend, and invest your money can have a deep impact on your future financial standing. All the financial concepts you have learned in this subject can also be applied to your personal finances, as the basics are the same and never change.
Personal capital structure is your mixture of debt and equity that is used to finance your own lifestyle. As you build your savings, you'll eventually want to invest some of your money so it grows over time. You can put your savings into some simple, low-risk investments like a bank, but then your return will also be low. Individuals should use debt in moderation and only to help purchase assets with the potential to grow in value, such as a house. Like a firm, use of excessive debt without the ability to make interest payments and to reduce the principal can lead to financial distress.
Required
For this part of the assessment, we ask you to reflect on the ‘Optimal capital structure theory’ introduced in this subject for the firms, and apply the same for your personal capital structure situation. In your view, have you used this theory to decide your own capital structure?
Corporate Finance Two
Name
Institutional Affiliation
Corporate Finance Two
Introduction
Finance managers are often faced with decisions on the management of assets and the implication of their decisions on shareholders. These decisions are mainly investment and financing decisions. Investment decisions affect shareholders by increasing their wealth, hence directly increasing their confidence in the firm. Financing decisions affect the stability of the firm and keep the company running in the competitive market. The decision that financial managers make is watched by current and potential shareholders, competitors, and the overall business community. As such, it is important that financial manager makes decisions that will not harm the company’s stakeholders. This study explores the decisions of financial managers from the point of view of payout policies and capital structure policy.
1 Payout Policy
Masulis and Trueman (n.d.) define dividend payout policy as a set of guidelines that a firm uses to decide the amount of its earnings will be distributed to shareholders. Some companies pay dividends to shareholders while others do not. Dividends are essentially part of a company’s profits and companies that pay dividends have reasons why they do this. Companies paying dividends have dividend policies. Cash dividends convey a message to the company’s shareholders and every company should critically analyze its policy before going ahead to use the policy to pay dividends to its shareholders.
* Arguments in Favor of Paying Dividends
The main role of a financial manager is to maximize shareholder wealth. Shareholder value, also called shareholder wealth is the worth guaranteed to residual owners of an organization in an effort to fully utilize the available resources in the firm. Shareholders invest their money in form of shares with the intention that the company will fully utilize the resources to maximize their wealth. A company has a range of options to use the accrued profits for. It can expand into new markets, keep the money for reinvestment when something happens, or decide to return part of that money to shareholders as dividends. Financially strong companies opt for the last option above because of a number of reasons that it holds. Theoretically, researchers believe that companies that pay dividends have a higher stability in the market even in the face of recession. Additionally, dividends signals a firm’s stability and interest in the business. This raises the investors’ confidence and they are likely to invest in the company because they believe that it is willing to take a risk and give them value for their money. Dividends are also likely to rise or lower depending on the economic performance factors, signifying that the company is at least doing something in the market. Scholars have also argued that companies that pay dividends have a higher value in the share market compared to those that do not (Snajdr, 2009). Additionally, there are times when failing companies attract investors with higher share prices. They create an illusion of higher profits to attract investors to rescue them, only for them to go bankrupt because they cannot recoup enough profits to pay back to the investors. Dividends are also a sign that a company values its investors and wants to take care of them. Investors want to create a mutual relationship with a firm because they know that the company has always supported them and it is likely to keep doing that in the long-run.
While dividends seem to be an attractive way to generate revenue for the company through attracting investors, financially ailing companies should not opt for this option. Generally, dividends attract the aging population or retirees who are looking for a way to make a fixed annual income (Tahir, 2010). Poor dividend policies that are not based on the research on the financial market are likely to harm a company. Companies should be prepared to provide a long-term dividend if they really want to invest one because failure to provide a record of one will repel investors. Additionally, the policy should provide for flexibility in the financial market to prevent the firm from using its revenue to settle debts. An upcoming firm should rather shun dividends because investors.
* Impact of Taxation on Financial Dividend Policy
One of the things that investors look at while making financial decision is the impact of taxation on the dividends from a company. Generally, investors want o increase their wealth and taxes eat into this wealth, making it impossible for them to maximize their wealth. As a result, different countries have developed different taxation systems in the world. These systems have direct impact on corporate finance shareholder’s policy. In Australia, dividends are taxed under the system called imputation (Australian Taxation Office, 2018). Australian government differentiates dividends paid by foreign companies from those paid by resident companies. For non-resident companies, the taxes paid by the company to the government are done under a franking method. Under this method, the shareholder is saved from the double taxation because the dividend has already by the company. The shareholder reduces the taxed amount in the percentage equal to the one that the parent company used to tax the money from the company. There are two types of franked dividends. The first option is where the authority is notified that the shareholder’s dividend had already been taxed hence the dividend is tax-free. The other option is where the taxed amount is added to the shareholder’s dividend. Australian government uses the second option where taxes are added to the shareholder’s dividends.
Franked dividends range from zero to hundred per cent implying that there are dividends that are partially franked. Partially franked dividends are a mixture of franked and unfranked dividends to shield the investor from double taxation (Atmaja, 2009). In Australia, franked payouts attract investment from residential investors and hence to economic growth. They are also advantageous to shareholders because they reduce the taxes that residents pay on their income. Most shareholders are retirees and they treat dividends as income, implying that double taxation harms their income. In absence of franking taxation, the shareholder is at risk of being taxed twice, once from the company level and then at the personal level.
c). Wal-Mart’s Residual Dividend Policy
Different companies opt for different dividend payout rations. Some companies opt not to pay out dividends while others opt to pay dividends for reasons based known for themselves and the interest of shareholders. Wal-Mart uses the Residual dividend policy. Most companies that use residual dividend payout policy do so by funding their businesses with the profits before going ahead to pay dividends to the shareholders. The company only uses this approach when it has met all the internal costs of operation, making sure that the firm remains relevant and competitive in the market throughout. The advantage of residual dividend policy is that it minimizes floatation and liquidation costs to the firm. It is also flexible for Wal-Mart because it can rise or go down depending on the profits generated from the market. This allows the firm to keep competing with companies that do not use dividend policies.
2 Capital Structure Policy
Listed companies have a range of options to source funds for their operations. They can source debts from financial debts, equity on shares, or a portion of both. The capital structure of a company is a mixture of its financial equity and its financial debts. Some companies operate on both financial capital and financial debts while others operate on only financial equity. In any case, companies settle for options that they are comfortable with depending on profitability. Financial debts are funds that a company borrows from banks, mortgages, or other financial institutions with the aim of paying back with interests. A debt is a liability that the firm incurs with the agreement to pay the agreed interest regardless of whether the borrowed amount attracts profit or not. Financial debts are tax-free, hence most companies opt for them instead of equity. Financial debts are also preferred because they are thought to be cheaper and less risky compared to financial equity. Companies with long-term investment goals will always opt for financial equity instead of financial debts. Debts are only applicable where the company wants to meet short-term goals like securing funds for a new investment or asset in the market.
a). It Is Obvious that Companies Should Use as Much Debt as Possible
Companies opt for debt financing because once the debt has been acquired; the firm retains the obligation of running its business without external influence. The firm has the obligation of settling the agreed debt at the agreed time and the lender does not have to intervene or understand how the borrowe...