Accounting and Finance for Decision Making: Dividend Policy Analysis

This assignment analyzes the dividend policy of Scommine Company, a major electricity provider, in response to a government announcement regarding environmental regulations. The analysis evaluates the market reaction to the announcement, which negatively impacted the company's share price due to anticipated costs of compliance. The assignment then assesses three dividend strategies: paying a cash dividend, paying no dividend, and declaring a scrip dividend. The analysis includes calculations for each strategy, considering the impact on shareholders and the company's financial position. The discussion delves into the arguments for and against the relevancy of dividend policy, exploring models like the Walter model and Modigliani-Miller model. The conclusion recommends a scrip dividend strategy as the most beneficial option, balancing investor needs with the company's financial constraints and compliance requirements. The paper emphasizes the importance of dividend policy in financial decision-making and its effect on share price performance.

Running head: ACCOUNTING AND FINANCE FOR DECISION MAKING
Accounting and Finance for Decision Making
Name of the Student:
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ACCOUNTING AND FINANCE FOR DECISION MAKING
Table of Contents
Introduction:...............................................................................................................................2
a. Evaluating the market reaction to the government announcement:.......................................2
b. Evaluating each of dividend strategies:..................................................................................3
c. Discussing the argument for the relevancy and irrelevancy of dividend policy:...................6
Conclusion:................................................................................................................................8
References and Bibliography:....................................................................................................9

ACCOUNTING AND FINANCE FOR DECISION MAKING
Introduction:
The assessment aims at evaluating the significance of dividend policy, which has been
argued by different researchers all over the world. The report directly evaluates the
significant information’s of the case study that highlights the dividend conditions of
Scommine Company, which are the largest electricity generator and distributor in the country
of Highland. Thus, adequate discussion on the overall announcement from the government is
relatively analyzed for identifying the reaction of the investors on the share price of the
organization. Further evaluation is conducted on the overall different strategies that was
developed by the directors and identify the impact it would hold on the typical shareholder
that has exposure of 120 shares in the organization. Lastly, the adequate arguments are
conducted on the relevancy and irrelevancy of dividend policies that are used for determining
the firm's value. Moreover, the adequate dividend strategy that needs to be implemented by
the company after considering all the relevant factors adequately discussed.
a. Evaluating the market reaction to the government announcement:
The market reaction to the announcement conducted by the government has an
adverse impact on the performance of the company’s share price. The government has mainly
indicated that the electric producing companies need to use environmentally friendly
processes while generating the relevant electricity for the sale. The information delivered by
the government will directly alter the overall production conditions the electric producing
companies, which in turn might initiate high level of cash outflows by the organization. This
announcement came with the deadline, where within the time limit the organizations need to
the improve and develop their current production conditions (Kumar, Kanujiya & Kumar,
2018). Thus, the announcement of the government had negative impact on the share price
moment of Scommine Company, where the share value on the day of the announcement

ACCOUNTING AND FINANCE FOR DECISION MAKING
declined from the levels of $2.20 to $1.95. Moreover, after the announcement the company’s
shares have been declining to new lows and is currently trading at the levels of $1.90.
This decline in the share value of Scommine Company was due to the sudden change
in the perspective of the government regarding the environmental conditions of electric
producing companies. This accommodation would have negative impact on their cash
balance, as adequate level of improvements would be required for complying with the new
regulations. Moreover, if the compliance of the movement announcement is not made then
the company would be barred from operating successfully within the organization. Thus, the
information would have negative impact on the performance and financial capability of
Scommine Company. This anticipation of the declining financial performance triggered the
massive selling, which witnessed the decline in share price of the company. Jacob &
Michaely (2017) stated that external factors and policies have direct impact on the share price
performance of the company, as its operation and profitability is hampered due to
government intervention.
b. Evaluating each of dividend strategies:
The board of Scommine Company has directly constructed three dividend strategies
that can be used for adequately reducing the concern for the investors and compensating on
the overall announcement from the government. Dividend policy is considered to be one of
the major attributes of investment that is used by the organizations for effectively improving
their current demand in the capital market. Thus, with the help of dividends the organization
is able to motivate the investors to invest within the organization, which helps in increasing
the share value and market capitalization of the company (Baker & Weigand, 2015). The
adequate analysis of the three different strategies is depicted as follows.
Pay a cash dividend of $200 million:

ACCOUNTING AND FINANCE FOR DECISION MAKING
Particulars Value
Total Shares (in million) (A) 1,500.00
Dividend value (in million) (B) 200.00
Dividend per share (C=B/A) 0.13
Number of shares held (D) 120.00
Dividend paid to investors (CxD) 16.00
The first strategy that is selected as an option by the management is the payment of
cash dividend, which amounts to $200 million. The calculations for the above dividend
structure are provided in the table where an individual shareholder having an exposure of 120
shares in the organization would eventually get a dividend of $16 if the company continues
with the cash dividend proposal. However, current conditions of the organization is relatively
not adequate to provide the relevant cash dividend that has been proposed by the directors as
the strategy could lead to a reduction of overall profit levels of the company. In addition, it
would also hamper the overall debt conditions, as the company would require debt financing
to support the upgradation of the generators.
The company has an obligation of $350 million that needs to be used for upgrading its
overall generators to comply with the announcement made by the government. Therefore, the
company needs to comply with the government decision and adequately adopt
environmentally friendly processes by March 2019. This would lead to a high level of cash
distribution by the organization, which cannot be accommodated through equity financing,
and the current cash levels maintained by the organization. Therefore, the company need to
utilize the debt financing conditions to support both the upgradation of the generators and
payment of $200 million dividend to which investors (Renneboog & Szilagyi, 2015).
Pay no dividend:
The second alternative dividend strategy that is used by the organization is to pay no
dividends in the current year. This move will eventually reduce the overall cash outflows

ACCOUNTING AND FINANCE FOR DECISION MAKING
from the company for an amount of $200 million, which is mainly expected by the investors
in April. This mainly indicates that every organization does not pay any kind of dividend to
the investors the overall deteriorating share price of the company from 222 1.9 dollars per
share will shrink more in future due to the nonpayment of adequate dividends to the
investors. Dividend payments are considered to be one of the major attributes, which allows
the organization to deliver more investors and maintain the overall valuation of the share
price.
The nonpayment of adequate dividends to the investors has both advantage and
disadvantage to the organization. One of the major advantages that will be provided to the
organization is the reduction of cash outflows and occur ace of debt financing. This non-
adoption of debt financing would eventually help in improving the solvency conditions of the
company and reduce the overall interest expense that erodes maximum of the profits of the
organization (Al-Najjar & Kilincarslan, 2016). However, the major disadvantage of the
nonpayment of dividend is the decline in the share price of the organization, which has
started after the announcement made by the government. The nonpayment of the dividends
would directly result in the massive selling of shares by the investors who were waiting for
the dividends and value the share price on the basis of dividend payments and growth.
Declare a scrip dividend in April 2018 of 1 share for every 12 shares held:
Particulars Value
Number of shares held (A) 120.000
Scrip dividend (B) 0.083
Share dividend (C=AxB) 10.000
Total shares after Scrip dividend
(A+C) 130.000
The above table provides information about the third dividend strategy that is
intended by the organization. The directors directly want to declare a scrip share for every 12

ACCOUNTING AND FINANCE FOR DECISION MAKING
shares held by the shareholder. This type of dividend would eventually increase the level of
shares that is currently being floated in the market, as more shares would be provided to the
investors in form of dividends. The analysis of the above table has directly indicated that after
the overall declaration of dividend the overall shares of an individual will increase from 120
to 130. This increment eventually affects the overall valuation of the companies share and
reduces its market capitalization and share price.
Therefore, the continuous decline in the share price after the announcement from the
government would not hold after the dividend declaration, which would result in the erosion
of adequate market capitalization and capability of the company to ensure the investors with
future growth possibilities. However, the overall move of scrip dividend is relatively
beneficial for the investors and organization, as the company will only go through a small
change in their overall operations where the upgradation of the generators would ensure the
legality of their process (Jabbouri, 2016).
The implementation of the script dividend would eventually help the organization to
conduct its overall expenses on the generators while ensuring the investors to provide
adequate level of returns in the next dividend payment cycle. Furthermore, with the help of
the above decision the organization will eventually help to minimize the level of debt
exposure and increase its valuation after the upgradation announcement by the directors.
c. Discussing the argument for the relevancy and irrelevancy of dividend policy:
The relevancy and irrelevancy of the dividend policy have direct impact on the shar
price performance of the organization. Dividend policy of a firm is considered to be the major
factor in shaping the valuation of the organization that is conducted by the investors.
Investors making rely on the relevancy models and irrelevancy models for determining the
share price valuation of the organization. Baker & Jabbouri (2016) stated that investors use

ACCOUNTING AND FINANCE FOR DECISION MAKING
the dividend policy for determining the appropriate level of share price for the organization
and detect whether they are undervalued or overvalued. Dividends are mainly detected as the
portion of the profits that is shared by the organization with their shareholders, which is
considered as the appropriate way of wealth distribution. Therefore, it would be understood
that the decisions of the dividends are a crucial endeavor for the organization, as it might
have direct impact on the share price performance condition of the company.
Therefore, from the relevant evaluation it has been detected that financial managers
utilize the dividend decisions to the organization for improving their current investment
exposure. The financial manager makes the investment exposure on the basis of long term
financing decisions and wealth maximization decisions. The dividend policy of the
organization is mainly segregated under the two sections by the financial managers while
conducting relevant investment decisions. The dividend valuation of the company is mainly
dependent on the relevant theory and irrelevant theory that is used by the company for
securing their investment conditions (Cheung, Hu & Schwiebert, 2018).
The relevancy theory mainly comprises of models such as Walter model, Gordon
Model and Bird in hand argument. These models are mainly used by the organization for
appropriately utilizing the dividend information, which could help in depicting the current
valuation of the company. On the other hand, the irrelevancy theory mainly comprises of
Modigliani-Miller Model, which mainly evaluates the dividends conditions of the
organization, which indicates that the dividend is irrelevant for the valuation of the
organization. Thus, it could be understood that relevancy theory is much more beneficial for
detecting the appropriate valuation of the organization.
From the relevant evaluation of the three options, it has been detected that choosing
the third option of ‘Declaring a scrip dividend in April 2018 of 1 share for every 12 shares

ACCOUNTING AND FINANCE FOR DECISION MAKING
held’ will be most beneficial for the organization. The accommodation of the scrip dividend
would be beneficial for Scommine Company, as the management will be able to reduce the
level of cash outflow. This would eventually help in reducing the comprising cash outflow
and maintaining adequate financial performance. However, other decisions that was proposed
by the directors would instigate massive selling, as investors with no dividends would reduce
the share value of the company. In the similar prices the increment in debt would also
increase the change of insolvency and reduce the share price of the origination. Therefore,
using the scrip dividend would eventually allow the organization to provide additional
benefits to the investors, while compensating for the expenses on the upgradation of the
generators (Florackis, Kanas & Kostakis, 2015).
Conclusion:
From the relevant evaluation of the above assessment the measure that needs to be
taken by Scommine Company is adequately depicted. The case study has indicated that after
the announcement from the government the share price conditions of the company was
deteriorating, while the decisions also needs to be made regarding the dividends that was due
in April. The analysis and dissection of the three measures proposed by the directors have
directly indicated that decision three the ‘Declaring a scrip dividend in April 2018 of 1 share
for every 12 shares held’ is the most appropriate decision for the organization and investors.
The analysis of the relevancy and irrelevancy theories is also conducted, which helps the
investors to value the organization’s current position, which helps in making adequate
investment decisions. Therefore, the directors need to declare scrip dividends, as which will
have no impact on the current debt levels, as the company would be paying dividends in form
of shares and accommodate the upgradation required for complying with the government
decisions.

ACCOUNTING AND FINANCE FOR DECISION MAKING
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ACCOUNTING AND FINANCE FOR DECISION MAKING
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dividend policy in Indonesia. Journal of Asia Business Studies, 10(3), 230-252.

ACCOUNTING AND FINANCE FOR DECISION MAKING
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