Financial Management: Dividend Policy, Mergers and Takeovers

This document discusses various topics in financial management, including dividend policy, size of annual dividend, practical issues in deciding dividend payment, effect of options on shareholder wealth, and valuation methods in mergers and takeovers.

FINANCIAL
MANAGEMEN

Table of Contents
INTRODUCTION...........................................................................................................................3
1. DIVIDEND POLICY..................................................................................................................4
1.1 The size of the annual dividend to return to its shareholders................................................4
1.2 Practical issues that need to be considered when deciding on the size of the dividend
payment........................................................................................................................................6
1.3 Effect of options on the wealth of shareholder......................................................................7
1.4 Critically discuss how company’s decision will be influenced by opportunity to invest
£70m in a project.......................................................................................................................10
2. MERGERS AND TAKEOVERS..............................................................................................11
2.1 Price / earnings ratio:...........................................................................................................11
2.2 Dividend valuation method..................................................................................................11
2.3 Discounted cash flow method..............................................................................................13
2.4 Problems associated with using the valuation techniques...................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
The organization is a mixed society that begins its work by accepting capital from individuals.
Individuals invest capital in the organization while continuing to receive a reasonable wage. If it
is not possible for organizations to make as much profit as possible for speculators they would
normally go into the currency show effectively, at which point it will be difficult to raise
additional capital for such organizations, just as capital does for new organizations. in the same
way it is difficult to breed.
Two groups; Squeezeco and Aztec cover both profit and union strategy and seek ideas; where the
profit system consists of three alternatives and we discuss the best method chosen to help the
organization. Then again; Trojan builds assess the fundamental issues facing Aztec while closing
the build estimate by discounting various tools such as the proportion of profit to value, the profit
estimation strategy and the use of the method limited income to assist manager’s dynamic
approach.

1. DIVIDEND POLICY
1.1 The size of the annual dividend to return to its shareholders
Dividend is the portion of an organization's profit that is pronounced and distributed as a
standard of offerings or a fixed sum for each offer, at the choice and discretion of the group's
Board of Directors. Profits are actually a small part of the remainder that remains after valid
settlement of various types of assets and liabilities and so on after deducting all expenses as
a full salary. People in the group are just above the rest, despite not being able to spread
them quickly. Since the organization does not need capital, at that point the organization can
withhold all profits by not taking them for profit. In this case, no profit is reported and the
total benefit can be a separate asset or an overflow. When deciding whether to disclose a
profit, directors must consider both (Renneboog and Szilagyi, 2020).
(i) Fair consideration to the shareholders:
Accountants should properly assess the extent to which investors hope to reach an exchange
for capital and risk-taking. In the event that this does not happen, it can be very difficult to
keep investors satisfied and this can also affect the market estimate of the group's offerings
and the generosity of the organization.
(ii) Company requirements:
Maintaining the financial position of the organization is the primary responsibility of
administrators, regardless of whether individuals are required to take penalties for doing so.
Similarly, it is important for the administrator to be able to adequately assess the level of
additional capital required by the organization for development and expansion.
Some of the factors to be considered while deciding size of annual dividend are discussed
below:
Current financial position of the company: Regardless of whether Squeezeco is able to
receive appropriate benefits and provide profits, it is possible to imagine that the
organization's financial position will not be with the ultimate goal of being able to provide

cash profits. Despite the benefits and expenses, the group's volatile position could collapse.
In this case, the group can offer profits as additional offers. Hence, it the cash flow of the
company is highly volatile than size of the dividend considered by manager will be low.
Need for capital in future: The responsibility of Squeezeco lies in the hands of two or
three, so that they can allow it to pursue a great profit strategy as a result of legitimate
concern for the group and all of them for a few years. In any case, if the investors in the
group are very large and lonely, they can demand a liberal profit strategy. Hence, if more
capital is required in the future, then size of the dividend considered by manager will be low.
Ownership Structure: The ownership of the Squeezeco is in the hands of a few individuals,
so they can agree to follow a strict dividend-policy in the interests of the company and all of
them for some years. But if the shareholders of the company are very large and they are
divided then in such case they can insist for a liberal dividend-policy. Therefore if capital
structure consists of more debt than capital, then size of the dividend considered by manager
will be low.
Changes in state policies: The financial, modern and labor arrangements of the
administration can adversely affect the salary of the organization. This reduces the
Squeezeco's performance. Fiscal strategy can affect this as well (Straehl and Ibbotson,
2018). Thus, if the state policies changes more frequently, then size of the dividend
considered by manager will be low.
Public Opinion: The concept also affects Squeezeco's profit strategy. All areas are heavily
censored by high-profit organizations. Buyers are beginning to demand a reduction in the
cost of goods and an increase in their wages. Of course, both staff and officers of the
organization want more rewards from that benefit. Therefore, if public has opinion to
receive more dividend, than manager will considered large size of dividend.
1.2 Practical issues that need to be considered when deciding on the size of the
dividend payment
It's not just the components that influence the decision to appoint leaders to return to
financial experts for profit. Business matters go hand in hand with the industry as it
implements a wellness strategy. Some of these reasonable problems are discussed below:

Investors' Choice: the crucial issue is the selection or verification of financial experts; like
all speculators, they have different tastes and feelings. Part of the time he could not have
cared less for the benefits, but the association had to supplement these employment
payments when new assignments or existing industry development were received. The way
this move develops the cost of the tender is similar to the increase in the market cost of the
tender, which will benefit the financial experts at the time of the sale of the bids (Khan,
2020).
Various alternatives: entrepreneurs can offer benefits in two structures; Separation of the
earning of money and income. The problem for the company is choosing which option
should be used to satisfy financial experts by making their decisions between benefits and
financial gain.
Investor’s desire: It is difficult for the company to assess the financial experts' desire for an
income-oriented focus; Samplers pay more than previously expected because the association
is not focused on development and expects the cost of the offering to be reduced at a later
time.
Beneficiaries: after being invited to the association's proposals on the open market, he met
in common with a couple of financial experts; Carrying out the case shows who the offers
really are and who has to deliver them. Such companies are deemed to have an expected
termination date; Shareholders must list themselves as the beneficial owners on the specific
date the company submitted an offer (Setiawan et.al., 2016).
Act of Rules: The regulatory authority has substantially changed rules for the association,
after which the association would have to pay whatever, for example, the company required
a fixed amount of maintain a reserve to benefit from allowances. For example, if the
association has given a 15% gain, 7.5% should be retained for spare parts at all times.
1.3 Effect of options on the wealth of shareholder
I. A cash dividend payment of 15p per share:
i. Cash Dividend:
A Total shares outstanding 1,250

B Dividend price per share 15p
Total cash dividend(A × B) £187.5
Cash Dividend: Cash dividend is an allowance granted by an organization from its income
to financial experts in the form of cash (check or electronic exchange). This exchanges
financial incentives from the group to the investors rather than the group that uses the
money for the assets. Be that as it may, this causes the company's bid cost to decrease by
an amount similar to the average dividend (Buchanan, and et.al. 2017).
Interpretation: The total outstanding shares are 1250 and these shares eligible to claim for
equity net profit after tax; here the choice made by company is to pay cash dividend
instead of any other option. That is the reason; the all out money profit at 15p per investor
is £ 187.5.
II. 5% scrip dividend:
Scrip Dividend: Scrip dividend, also known as liability dividend, is given by the
organization to its investors as proof rather than the cash profit that gives their investors the
decision to make profits for a later purpose or they can accept shares in a position for the
purpose of profit. Organizations make such profits when they do not have a reasonable
amount of money to make them as a profit (Moortgat, Annaert and Deloof, 2017).
ii
. 5% Scrip Dividend
A Total shares outstanding 1250
B Scrip divided (A × 5%) 62.5
C Share price 432p
Total dividend worth (B
× C) £270

Interpretation: Here, the total outstanding shares are 1250; a proportion of 5% is taken
from all out offers as all out profit which is 62.5. The cost per share is given at 432p per
share; thus the updated profit of shareholders if they accept this offer will be £ 270.
III. Repurchase of 15% of ordinary share capital at the current market price:
In the event that the size of the offer repurchases increases by more than 10 percent, at
that point investors should bid for it. Another consensus position for stock repurchase
companies is that the proportion of full liability, both insured and non-insured, on the
group should not exceed twice the group’s fixed capital and the group’s savings -free
after they offer purchase. This value must be extended if a higher proportion of the
normal value of each bond is specified in the Group Act.
Repurchase of 15% ordinary share capital at the current market
price
Total ordinary shares 1250
A 15% of ordinary shares 187.5
B Current Share price 432p
C Previous share price 50p
D
Total Profit on each share
(B -C) 382p
Total shareholders worth
(A × D) £716
Interpretation: The total shares outstanding are 1250 and at a rate of 15%, 187.5 offers
should be repurchased at current market cost. The cost of the association's offer is 50p
and the current market cost is 432p; The 382p is a win for both experts. The primary part
of this methodology is; Squizeco repurchases its offer and shows it has been declared an
advantage, a quick move undertaken by the company (Ehrhardt and Brigham, 2016).
Comparison:

After analyzing above three alternatives; it was found that the maximum profit earned by
the shareholders is in alternative iii; where the organization is repurchasing its normal
offers. What's more, the most minimal profit is paid in the primary choice where the
organization is delivering profits through cash dividends.
1.4 Critically discuss how company’s decision will be influenced by opportunity to
invest £70m in a project
For an estimate of £ 70 million; the main influence on the decision is to decide to gather
resources for the adventure. There are three options open to the group owner; funding through
commitment, resource growth or the use of points of sale and surplus through the issuance of
high value offers. Focus and injury are on these three decisions. Also, as usual, use a
combination of all these methods. For instance; the company can divide store requirements into
three levels, for example, 30% through commitment, 60% through offering high value offers,
and the remaining 10% through stores. If an appeal event arises, the association has three other
options:
 Right issue of shares to existing equity holders.
 Issuing preference shares having fixed rate of dividend payment and;
 Issuing ordinary shares at reduced market price (Shapiro and Hanouna, 2019).

2. MERGERS AND TAKEOVERS
2.1 Price / earnings ratio:
Price Earnings ratio is the extent of the association's present flexibly cost to be acquired per
share. It gives a thought of the degree to which the market is happy to pay for the body's pay. It
additionally shows how the stock is esteemed in the commercial center (Zietlow, and et.al.,
2018).
Interpretation: The above outcomes show that Trojan plc, a monetary master, procured 27 pence
per share. To acquire the worth creation rate or P/E valuation; the complete flowed installment is
isolated by the astounding full-size offer or the issue of offers by the affiliation short revenue and
costs. The affiliation's well deserved payout here this year is at £ 40.4 million and obviously the
stunning proposals at 147 million.
2.2 Dividend valuation method
On the off chance that profits are steady in interminability, the offer gauge is the current gauge of
income per share over the long haul, with a stretch. Let D1 talk about the consistent benefit per
portion of a consistent stock expected for the following period and every period from that point,
always, P0 will discuss the expense of a part of the stock today, and the necessary pace of return
for the hidden stock. 1 Current expense is essential for the fundamental timetable, P0:

P0 = D1 ÷ r.
The necessary degree of return is the compensation for an opportune gauge of the measure of
cash secured their gauge and the weakness of cases to get pay from these endeavors. The more
evident the weakness, the more clear the cadence needed to bring it back. On the off chance that
the current benefit is £ 2 for every offer and the necessary yield rate is 10%, the assessed portion
of the stock is £ 20. That way, simply in the event that you take £ 20 for every offer and there
will be benefits remaining stable at £ 2 for every offer, you will get a 10% profit for every year
for your standard productivity.
On the off chance that profits develop at a steady rate, the offer gauge is the current gauge of
developing income. We decide the current benefit D0 for this period. In case benefits don't create
at a consistent rate, g, the current gauge of the ordinary stock is consistently the current gauge of
any future benefit, which will come - in the intriguing instance of benefits creating at a steady
rate g - turning out to be what is generally alluded to as the profit valuation model (DVM):
Dividend Discount Model Fair Value: £4.774
Expected Growth Rate = (1 – Dividend Payout Ratio) × Return on Equity
Expected Growth Rate = (1 – 0.48) × 0.27
Expected Growth Rate = 0.14
Expected Dividends Next Year = Dividends per Share × (1 + Expected Growth Rate)
Expected Dividends Next Year = 0.13 × (1 + 0.14)
Expected Dividends Next Year = 0.148
Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium
Cost of Equity = 0.05 + 1.1 × 0.11
Cost of Equity = 0.171
Fair Value = Expected Dividends Next Year / (Cost of Equity – Expected Growth Rate)

Fair Value = 0.148 / (0.171 – 0.14)
Fair Value = 4.774
Interpretation: After the computation it arose that the gauge of the present benefit choice is 4.774
pennies per share. To exhibit the circumstance; Market share rate, free buoy rate and anticipated
beta estimation of renowned works; The market rate or level of danger is generally demonstrated
as this extra cost is thought to be tested through hypothesis. In spite of the fact that the free buoy
rates are not bargained as there will be no real way to lose focal point of exertion.
2.3 Discounted cash flow method
Discounted cash flow (DCF) is a valuation strategy used to gauge a free organization's gauge of
their future pay. DCF's examination looks to sort out the present organization gauges, in view of
projections of how much cash it will create straightaway. This applies to both cash related
profiteering for examiners and business people wanting to make changes to their associations, for
instance by buying new equipment (Shakeel and Datta, 2020).
Discounted cash flow method
Yea
r Net Income £m Discounted cash flow @7%
1 £40.40 £37.76
2 £41.21 £35.99
3 £42.03 £34.31
4 £42.87 £32.71
5 £43.73 £31.18
£171.95
Interpretation: In this manner subject to the figuring of restricted pay of distributable
compensation with a yearly advancement movement of 2% per annum; it was found that the
association would get a full scale cash of £ 171.95m (the current worth) around the
completion of 5 years (Anthony, 2019).

2.4 Problems associated with using the valuation techniques
There are a few snags and issues in utilizing the above appraisal techniques, which are examined
underneath:
1. The first is that it can't be utilized to assess stocks, which don't deliver benefits, with little
respect to capital expands; it very well may be conceded that by placing assets in stocks. DDM
depends on the inadequate thought that a bidder's key recommendation is to accomplish benefit
through benefits.
2. Another disadvantage is the manner in which the worth appraisals utilized requires various
suspicions about things, for instance, the pace of progress and the necessary pace of return. It is a
model that benefits will change over the long run. In case none of the presumptions or doubts
communicated in the figure are marginally in blossom, an examiner might be required, who will
decide the thinking for the stock, essentially regarding adding or diminishing the decrease. There
are a few sorts of DDM Shut to take care of this issue. Nevertheless, the vast majority of them
contain gas and abundance charges that are similarly inclined to time-broadened mistakes (Xu,
2017).
3. A further investigation of the DDM is that it neglects the impacts of the acquisition of offers;
there might be a huge distinction in the estimation of the offer got back to financial specialists.
The oversight of the acquisition of offers is an impression of DDM's incredible worry, as
caretaker, with evaluations of offering costs.
Recommendation:
Thinking about the definitions and hindrances of multiple procedures; It is suggested that Aztec
follow the net default esteem way to deal with think about Trojan PLC. The explanation behind
this is that each organization is breaking its yearly assessment and the two methodologies
perceive the advantage as a fundamental belief; and the other framework keeps away from wage
hypothesis and estimation that has nothing to do with direct exertion. The repayment model is
hence enigmatically concurred for use in the assessment of Trojan PLC (Zhang, Li and Ren,
2016).

CONCLUSION
After analyzing all the dividend methods and long-term financing valuation issues, it is
suggested that the association apply the revolving tool to estimating the most sensitive stocks. to
record. Since a reasonable estimate of the offers in this commission is determined by
consideration of the benefits promotion model, which has a number of problems with the
evaluation of offers; To overcome this limitation, the association can implement a multi-level
advantage token model; This model addresses the issue of examining the incentive for aviation
benefits and will help anticipate the specific promoter by measuring different development
methods of calculating dividend.

REFERENCES
Books and Journals