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Dividend Policy and Financial Analysis: Assignment

   

Added on  2021-01-03

18 Pages4960 Words450 Views
Dividend Policy and FinancialAnalysis

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3PART A ..........................................................................................................................................3A. Explaining the dividend irrelevancy theory and its assumption............................................3B. Explaining the dividend relevant theory.................................................................................4C. Summary based on comparison among theories....................................................................6PART B............................................................................................................................................7A) Financial performance of company using indicators.............................................................7B) Assessing debt capacity of organisation..............................................................................11C) Financial and business risks of organization........................................................................13(D) Recommendation for purpose of optimal mix for GSK Plc...............................................14CONCLUSION..............................................................................................................................15REFERENCES..............................................................................................................................17

INTRODUCTIONDividend policies are to be implemented in effective manner so that shareholders' wealthcan be increased. Present report deals with various dividend theory such as irrelevance andrelevance theory and models are discussed. On the other part, GSK Plc's financial performanceover last five years is analysed and ratio analysis is conducted. Moreover, capital structure oforganisation is made and mix of debt and equity is analysed. Recommendations to improvecapital structure are also provided along with business and financial risks are evaluated in abetter way. Hence, complete financial health analysis of company is done in effective manner. PART A A. Explaining the dividend irrelevancy theory and its assumptionIt is a theory in which investors have no worry whether adequate dividend policy isimplemented by the company or not. It is because option is provided to them to sell off sharesheld by them and as a result, cash is provided. This dividend policy is useful the firm as priceand cost of capital is not affected. This theory identifies that dividend policy is independent onvalue and market price of shares. Assumption is made by the theory that markets are perfect andstockholders' can build their policy by selling or purchasing stock in the markets (Jabbouri andAttar, 2018). The theory indicates that if shareholders need the cash they can sell their shares,and if they do not want in cash they can hold up their share with them. Brokerage fees areexempted and the same is treated if capital gains are involved in this irrelevance theory.Modigliani and Miller proposed that the dividend policy implemented by organization isindependent and do not influence share prices of organization. In this irrelevance theory of thedividend MM proposed that when a shareholder attains dividend in excess than he has the optionto again invest the company's share in relation to cash flow (Kaur and Saraf, 2014). On contraryto this, if dividend is small, it can be sold. In both the cases, investors are relevance. In both thecases it is irrelevant because investors are creating their own cash. Assumptions of the dividend irrelevant theory are as- All sort of taxes is ignored (personal taxes, corporate taxes) There is no flotation cost or transaction cost at the time when company is taking decisionof cost.There is no impact on dividend policy, when a firm decides in capital budgeting. All the investors have all the information about firm’s future

Zero impact of leverage has on the cost of capital of the company (Baker and Jabbouri,2016).Argument in favor of the dividend irrelevant theoryThis theory allows the perfect markets as it believes existence of it. Kaur and Saraf,(2014) stated that investors behave rationally and as such, complete access with relation toinformation is provided. Furthermore, flotation costs do not prevail. Both capital gains anddividends are taxed at same rate due to absence of tax. In addressing this, investment policy isfixed and no changes are made in it. Shareholders are certain regarding market price of shares inthe future. However, Jabbouri and Attar, (2018) argued that perfect market do not exist.According to them in this theory, no difference is observed in between external and internalfunding. Therefore, it is uncertain to consider the flotation cost of new issues. They argued thatthis theory believes that the wealth of company's shareholder does not affect dividends.However, there are flotation cost prevails in relation to sell of shares to generate cash inflow.They also object the no certainty is unrealistic. The theory holds mix empirical evidences andproper conclusions are not drawn yet. This is because in real business scenario, organizationmakes budget by taking into account dividends to be paid in more or less same manner whichthey do for cash outflow like capital expenses, future need of cash, requirements for debtservices etc. Hence, constructive conclusions are yet to be drawn.B. Explaining the dividend relevant theoryThe Walter modelsIn accordance with the approaches based on this theory it can be said that there are nodifferences in the dividend and investment policies. It identifies a clear relationship among thecost of capital, internal rate of return and the return on investments. Therefore, it has the impactsover the overall performance in firm as well as impacts over the market value.Following are the assumption of Walter model:There will be funding through retained earning expect various other external sources.There will be consistency in the rate of return and the costs of capital in any investment.Consistency in various asset value of firm such as EPS and DPS.Argument in favor of the dividend relevant theoryAs per the views of Rafique and Javaid, (2017), Organization develops the policies andprocedure of making payments of dividends among the shareholders of the firm. Therefore, the

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