Question

Principles of Finance II WEEK 4: Discussion Prompt #1 Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders. There are three main approaches to dividends: residual, stability or a hybrid of the two. For this discussion, research a publicly traded company that you are interested in or would like to know more about. State what type of dividend policy they currently use. In addition, explain whether you would invest in this company knowing how they pay out dividends.

Answer 1

Dividend policy-making is an important part of enterprise profit distribution, and moderate and reasonable dividend distribution policy is beneficial to the development of enterprise and improving the earnings level in the future, as well as enhancing shareholder confidence in the enterprise, making the enterprise develop and grow in a healthy environment

The choice of dividend policy is that managers balance the enterprise development and repaying the investors with investment interests, so that it can be more conducive to realize the development goals for enterprise in the future.

Type of dividend policy

Surplus dividend policy is the dividend policy that enterprise distributes the net profit achieved in this year under the premise of meeting the enterprise investment project.

Fixed dividend policy is the dividend policy that enterprise annual allocate the
fixed per share dividend amount, and will not change by other factors
influence

Steadily increasing dividend policy is the policy thatdividend per share
maintains stable growth trend for enterprise during a period of time.

Fixed dividend payout rate dividend policy
The policy is the dividend payment policy that the enterprise keeps fixed
dividend payment rate, and actually makes the dividend of enterprise changing
due to the difference of net profit.

Low normal dividend and extra dividend policy
The dividend policy is the policy that the enterprise, in the premise of
maintaining lower fixed dividend every year, according to operating profit of
enterprises this year, addsto the appropriate extra dividend.

Evaluation index of dividend policy

Dividend payout rate refers to the ratio of annual realized total amount of
dividends of the enterprise to realized total amount of net profit

Dividend yield
The index is the ratio of the dividend per share and the stock price of
enterprise, which reflects the earnings that corporate per share can achieve, and
is an important indicatorinvestors judge investment risk of enterprise

Ways and characteristics of dividend payments

Cash dividend is a dividend distribution way that the enterprise distributes net
profit to the shareholders in the form of cash.

Stock dividend is a dividend distribution way that the enterprise distributes net
profit to the shareholders in the form of stock

This answer takes financial statements information of
Qingdao beer co., LTD. in nearly five years as the foundation, and analyzes and
studies the decision characteristics of dividend policy

LTD.from 2007 to 2011, on this account to analysis the company's current
dividend policy.Qingdao beer plans to invest and establishChengdu branch office,
and needs cash 1.25 billion, so the enterprise surplus cash amount is 90 million
in 2007, 100 million in 2008, 260 million in 2009, 60 million in 2010,520
million in 2011.So in the next five years enterprise surplus cash amountsums to
1.03 billion

If adopting the surplus dividend policy, because under the residual dividend
policy, the cash is all distributed after the enterprise extracts needed amount of
money for investment from net profit, the enterprise's cash balance is zero.And
then it will push out the dividend per share and dividend payment rate of the
enterprise

If adopting the fixed dividend policy, the net profit of
enterprise in late five yearsis 3.75 billion, and in the five years enterprise surplus
cash amount is 1.03 billion, thus the enterprise surplus cash accounts for about
27% of net profit, thus determines enterprise's dividend payment rate is 30%.

Based on the above analysis,it can be seen that under the three kinds of given
dividend policy, the fixed dividend policy and the fixed dividend payment rate
policies are optional.If under the fixed dividend policy, the investment income of
surplus cash is greater than the financing cost and tax under the fixed dividend
payment rate policy, the fixed dividend policy.On the contrary, the fixed dividend
payment rate policy should be chosen.