FIMA5020 - Financial Management: Dividend Policy and Brexit Impact

This report provides a comprehensive analysis of dividend policy theories, including the theory of irrelevance and the 'bird in hand' theory, evaluating their perspectives on dividend relevance in corporate finance. It also examines the potential implications of Brexit on the UK financial industry, focusing on regulatory effects, cross-border trade implications, economic effects on the City of London, and funding arrangements. The report offers recommendations for financial institutions to navigate the challenges posed by Brexit, emphasizing the need for understanding exposure levels, assessing industry impacts, and planning for various Brexit consequences. This student-contributed assignment is available on Desklib, where students can access a wealth of past papers and solved assignments.

Running head: FINANCIAL MANAGEMENT
Financial Management
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Table of Contents
Part A:........................................................................................................................................2
Analysis of two perspective of dividend policy based on relevant theories..............................2
Introduction:...............................................................................................................................2
Description of the appropriate theories:.....................................................................................2
Theory of irrelevance:................................................................................................................3
Theory of dividend payment preference (A Bird in the Hand Theory):....................................4
Conclusion:................................................................................................................................4
Part B:.........................................................................................................................................5
Potential Implications for Brexit on the UK Financial Industry:...............................................5
Introduction:...............................................................................................................................5
Impact of Brexit on UK Financial Industry:..............................................................................5
Regulatory Effect:......................................................................................................................5
Cross border trade implications:................................................................................................6
Economic effect on the city:......................................................................................................7
Funding arrangements:...............................................................................................................7
Recommendations:.....................................................................................................................7
Conclusion:................................................................................................................................8
References:.................................................................................................................................9

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Part A:
Analysis of two perspective of dividend policy based on relevant theories
Introduction:
The growth of the dividend policy is diligently associated with the development of the
corporate government of the Western Europe. Over the time, dividends were restricted and
associated with the profits and payments from the present earnings. Dividend policy can have
described as being the set of guidelines used in the company to decide the amount of earnings
to pay its dividends to the numerous shareholders (Ardalan 2017). When a corporation has
the excess earnings at the end of the bookkeeping cycle, it generally has two possibilities,
relating to the management of profit. Companies can either decide on distributing the
earnings as the dividends or it may decide on re-investing the money back to the retained
earnings.
The insufficient control over the management of company, insufficient lack of
transparency regarding the financial information and the prospects of venture are the reasons
why the payment of dividends is regularly preferred for reinvestment of the profits by the
shareholders (Shahar et al. 2015). The vitality of the question regarding the relevance of
dividend in the recent development of the capital market that has resulted in the rise in the
efficiency.
Description of the appropriate theories:
Despite the fact that the dividends are very much important and the normal method of
returning into the profit as well cash to the company’s shareholders, there are certain
companies that decides not pay the dividends. Big companies namely the Google and
Berkshire are the example of companies that do not pay the dividends (Ahmeti and Prenaj

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2015). The decision of not paying the dividends is mainly influenced by the major economic
slumps. When the economy is not performing well, companies may struggle and may find it
very hard to allocate everything to their shareholders given the net results is not adequate
enough. Even though in the case of Google and Berkshire, the budget has not anything to do
with the decision. There are some of the alternative theories that is related with the dividend
policy.
Theory of irrelevance:
As per this theory, under particular circumstances, the total worth of the firm is reliant
on the arrangement of capital, especially on the debt to equity ratio. According to this theory,
for the market participants there are certain probabilities associated to the effective arbitrage
(Edim et al. 2014). The theory explains that the perfect capital market prevails and includes
the zero fees, taxes and cost of bankruptcy. The theory explains that under the perfect capital
market the worth of company is not dependent on the dividend policy. There are only equity
financing and the needed funds may be obtained by issuing shares. The theory explains that
the amount of investment and dividend payment is equal to the net profit and proceeds
obtained from the disposal of new shares.
Theory of tax benefit from profit reinvestment:
The theory explains that because of higher taxation burden on dividends against the
capital gains the payment of dividend should be reduced. The theory explains that the taxes
on the dividends must be paid instantaneously while the capital gains tax must be paid only
after selling the shares (Tanushev 2016). As per this theory, to raise the investors wealth the
company must not pay the dividends. In order to circumvent paying higher taxes on the
allocated business earnings by the stockholders, corporate companies should use the buyback
of shares. The theory explains that the companies namely the Berkshire and Alphabet pay no

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dividend since this may lower their capital cost and may lead to rise in share prices. The
theory conclusively provides that if the burden of tax on dividends is bigger than the capital
gains then no kind of cash dividends must be paid to increase the shareholders net income
(Brusov et al. 2018). Repurchasing the shares is recommended to use the same as the
substitute for cash dividends.
A Bird in the Hand Theory or Dividend Payment Preference:
This theory explains that the bird in hand would have the impact if the investors uses
their dividends for the consumption or for purchasing the treasury bills, but if the investors
re-invest the received dividends in the same or the different company then the bird in the
hand would have no impact until and unless the company changes its investment policy
(Hertz, 2018). The theory explains that the value of the company is positively associated to
and ascertained by the payment of dividends. The theory arguably states that with the rise in
payment of dividend, the value of the company’s shares would rise significantly. The value of
shares is ascertained only in terms of the money that it brings (Priya, V. and Mohanasundari
2016). It is thought that shareholders generally choose dividend disbursements to highly risky
future capital gains or the expected obligation of the future share price.
Conclusion:
On a conclusive note, the analysis contributes that the dividend policy of a public
listed company may lead to influence on the shareholder’s decision making ability. The
influence of tax on dividends is considered as greatly economically rational and exogenous
factor, yet the same cannot be treated as the significant element of the company’s dividend
policy.
Corporate firms particularly Google and Berkshire that usually does not pays any
dividend may attract customers that prefer the capital gains over the dividends. While retain

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firms such as Sainsbury and Tesco pay significantly higher dividend due to their maturity
stage or because of insufficient investment. This may attract the customers, investors with the
lower rate of taxes which pays higher dividend.

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Part B:
Potential Implications for Brexit on the UK Financial Industry:
Introduction:
The decision undertaken by the UK to exit the EU possess the potential of creating
significant implications for the financial service sector. In detail, Brexit would create a
consequence for those financial institutions that is based in the UK and those that remain
dependent on the European Economic Area (EEA) “passport” to gain the access to the
solitary European market for the financial services (Dhingra et al. 2016). Despite that Britain
would be out of EU it would be impacted by the EU policies. Financial institutions that
decides to operate inside the EEA post-Brexit would require the financial institutions to
adhere with the EU regulations.
Impact of Brexit on UK Financial Industry:
The financial service sectors are vital to the economy of UK. However, the
continuous success of the UK as the Europe’s principle hub of financial services is presently
the central subject in the debate of Brexit (Sampson 2017). The report explores a detailed
look at the potential impact of Brexit on the UK Financial service sector.
Regulatory Effect:
The regulatory scenario is at present complex. There are several financial and banking
regulations are established by the international controllers but to some extent it is claimed
that the UK supervisory standards is highly advanced than those which is established by EU.
This suggest that any potential effect may be narrow. Contrariwise, a “Brexit” may lower the
general strength of banks because it may give rise to any type of crisis with deviating
responses from the regulators of UK and EU (Kierzenkowski et al. 2016). This may act as the

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sharp judicial challenge, with more than 40 years of regulations is not formally preserved in
the UK act.
A speedy way out to constant pass-porting preparations amongst the UK and the
single market would be of higher importance in the “Brexit” negotiations. The most
favourable impact is greatly to the capability of UK based institutes to trade the fiscal
services in the EU and may create an effect on the future decision by international
establishments (Bouoiyour and Selmi 2018). Regardless of the outcome, there would likely
be a continuous requirement of complying with the EU regulations so that it can continue to
perform the business all through the EU. Without a doubt, if UK were to leave, it is possible
that companies that are desiring to perform business all through the EU may have to face the
rising governing demand and possibly they would yet be compulsory required to adhere with
the MIFID II guidelines when it is presented in the month of January 2018.
Cross border trade implications:
One of the probable and the main recognizable risks to the financial segment is the
probable loss of pass-porting privileges for the company that are based in the UK that are
looking to sell their services in EU (Wright 2016). Companies may implement the model of
Swiss banking by performing business functions through the holdings without the pass-
porting rights. There are several firms that already have the distributing or servicing hubs
inside the EU namely, Luxembourg and Dublin. They take the benefit of resident expertise or
deal with the incidental problems in order to trade inside the sole market for services namely
tax.
There are several businesses that might look into the impression so that they can re-
determine provided that all the cross border functions are required, if that complication
generally arrives with the higher cost (Howarth and Quaglia 2018). In spite of the substitute

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options, there are some commentators that have projected that Brexit may lead to a
noteworthy loss in exports of financial services in the EU. During the long term, there may be
occasion of compensating any kind of probable loss by closing two-sided business
settlements with the rising financial centres, namely Singapore and Hong Kong with which
UK presently have significant cultural and historical relations.
Economic effect on the city:
A recent argument by James and Quaglia (2017) stated that the city would not be
effected by the challenge of “Brexit” during the short term since it enjoys the substantial
competitive benefits and a highly advanced system of abilities and upkeep services that
would be difficult to repeat somewhere else. Nevertheless, competing European financial
centres might renew the attempts of attracting the vital Euro linked undertakings and
arrangement by employing the arguments that are well performed from inside the Eurozone
under the EU supervision. The UK might find it difficult to repel such kind of attacks upon
losing its security from the European Court of Justice.
One potential effect that might be soon felt is the slowing of EU workforce which
presently comes for the purpose of work in the UK financial services (Armour 2017). The
visa requirement and work permit might produce an obstacle which may worsen the UK
economy, whilst consolidation other more hospitable financial centres.
Funding arrangements:
On the basis of the exact terms under which the “Brexit” happens, the free course of
the capital among the UK and EU may also be impacted. UK financial institutions, leading
from any kind of limitations on the party’s ability to move the free flow of capital across the
borders.

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Recommendations:
With the UK decision of leaving Brexit creates a big issue for the financial segment
and also this may give rise to numerous types of risks and unknowns, it is vital that
companies should use the left over time prior to the preparation of the referendum. At first
the companies should understand the level of exposure not simply directly but would also
comprises of thier counter parties, suppliers and customers. Furthermore, companies should
in detail assess the effect of industries under the most probable Brexit consequences. Lastly,
companies must complete the necessary exigency planning with the recognition of resources
and support so that it can cover the bigger risks and the most likely scenarios.
Conclusion:
Conclusively, by understanding the degree of market exposure to the most likely
outcome and placing strong plans in place for handling them, corporate companies can assure
that they are in good position to alleviate any kind of instant risks and also capitalize on the
long run prospects in advance of the competition. Unless the future relations of UK with the
EU needs membership of the EEA, UK financial institutions pass-porting the rights to the
other EEA member nation would be very much restricted to certain degree. If this occurs,
then the financial service institutions that are based in the UK would be required to look for
other alternative EEA base for their business functions given they decide to operate in the
cross border services.

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References:
Ahmeti, F. and Prenaj, B., 2015. A critical review of Modigliani and Miller’s theorem of
capital structure. International Journal of Economics, Commerce and Management
(IJECM), 3(6).
Ardalan, K., 2017. Capital structure theory: Reconsidered. Research in International
Business and Finance, 39, pp.696-710.
Armour, J., 2017. Brexit and financial services. Oxford Review of Economic
Policy, 33(suppl_1), pp.S54-S69.
Bouoiyour, J. and Selmi, R., 2018. Are UK industries resilient in dealing with uncertainty?
The case of Brexit. The European Journal of Comparative Economics.
Brusov, P., Filatova, T., Orekhova, N., and Eskindarov, M. 2018. Capital Structure:
Modigliani–Miller Theory. In Modern Corporate Finance, Investments, Taxation and
Ratings (pp. 9-27). Springer, Cham.
Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J., 2016. The impact of Brexit on
foreign investment in the UK. BREXIT 2016, 24, p.2.
Edim, N. O., Atseye, F. A., and Eke, F. A. 2014. Relationship between capital structure and
firm’s performance: Theoretical review. Journal of Economics and Sustainable
Development, 5(17), 72-76.
Hertz, J. A. (2018). Introduction to the theory of neural computation. CRC Press.
Howarth, D. and Quaglia, L., 2018. Brexit and the battle for financial services. Journal of
European public policy, 25(8), pp.1118-1136.

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James, S. and Quaglia, L., 2017. Brexit and the Limits of Financial Power in the UK. Global
Economic Governance Programme.
Kierzenkowski, R., Pain, N., Rusticelli, E. and Zwart, S., 2016. The economic consequences
of Brexit.
Priya, V. and Mohanasundari, M., 2016. Dividend Policy and Its Impact on Firm Value: A
Review of Theories and Empirical Evidence. Journal of Management Sciences and
Technology, 3(3), pp.59-69.

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Sampson, T., 2017. Brexit: the economics of international disintegration. Journal of
Economic Perspectives, 31(4), pp.163-84.
Shahar, W. S. S., Shahar, W. S. S., Bahari, N. F., Ahmad, N. W., Fisal, S., & Rafdi, N. J.
(2015). A Review of Capital Structure Theories: Trade-Off Theory, Pecking Order Theory
and Market Timing Theory. In International Conference on Management and Muamalah (pp.
967-978).
Tanushev, C. (2016). Theoretical models of dividend policy. Economic Alternatives, (3), 299-
316.
Wright, W., 2016. The Potential Impact of Brexit on European Capital Markets. New
Financial.