Question

Question Three

a)         For each of the companies described below explain which one you would expect to have a medium, high or low dividend payout ratio.

A company with a large proportion of inside ownership, all of whom are high income individuals.                                                                            

A growth company with an abundance of good investment opportunities.                                                                                                                          

A company experiencing ordinary growth, has high liquidity and much unused borrowing capacity.                                                                                 

A dividend-paying company that experiences an unexpected drop in earnings from the trend.                                                                                               

A company with volatile earnings and high business risk.                

b)         Globalization has resulted in several organizations engaging in corporate alliances and the establishment of several trading blocks. The advent of e-commerce has enabled companies to greatly expand their markets.

            Required:

Identify and elaborate on five (5) factors that complicate financial management in multi-national firms.                                                                                                           

                                               

Answer 1

a) Dividend Payout Ratio = Dividend Per Share / Earning Per Share

APS = Net Income / Total Shares Outstanding

1- A company with a large proportion of inside ownership, all of whom are high income individuals: Low payout ratio : Highly taxed owners generally prefer capital gains rather dividend income.

2- A growth company with an abundance of good investment opportunities: Low payout ratio : Earning are retained in business to support investment opportunities and there will be less residual funds to pay dividends.

3- A company experiencing ordinary growth, has high liquidity and much unused borrowing capacity: High payout ratio : The firm having high liquidity and no more assets expansion tend to pay higher dividend.

4- A dividend-paying company that experiences an unexpected drop in earnings from the trend: High payout ratio. Internal rate of Return is less than cost of capital of the company with unexpected drop in earnings. Optimum payout ratio of declining fiirm is 100%

5- A company with volatile earnings and high business risk: Low payout ratio : The company will retain earnings to build its financial strength and to offset high business risk.