FIN3CFI Corporate Finance: Dividend Policy, Repurchases & Returns

This corporate finance assignment delves into dividend policy, analyzing the signaling hypothesis, free cash flow hypothesis, and clientele effect. It discusses reasons for companies choosing share repurchases over dividends under a classical tax system. The assignment identifies dividend change an...Read More

Running head: CORPORATE FINANCE ASSIGNMENT
Corporate Finance Assignment
Name of the Student:
Name of the University:
Author’s Note:

2
CORPORATE FINANCE ASSIGNMENT
Table of Contents
a) Discussing the hypothesis related to dividend policy:...........................................................3
b) Briefly discussing five reasons behind comparing choosing for repurchase than dividend
under classical tax system:.........................................................................................................4
c.i) Identifying dividend change announcement of the organisation:........................................4
c.ii) Calculating the three-day return earned by the firm for the period:...................................5
c.iii) Calculating the market return for the corresponding periods:...........................................5
c.iv) Calculating the excess returns:...........................................................................................5
c.vi) Discussing the relevant theory with the finds:...................................................................6

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CORPORATE FINANCE ASSIGNMENT
a) Discussing the hypothesis related to dividend policy:
Signalling Hypothesis:
The hypothesis directly conveys the information regards the future earnings, which
directly affect the level of dividend payment and performance of its share price. The
signalling hypothesis directly indicates the future earnings of an organisation, which in turn
allow the investor to detect the level of dividends that will be paid by the organisation.
Free cash flow Hypothesis:
The free cash flow hypothesis directly indicates that the management will be more
disciplined with fixed debt conditions, as it might force the mangers to make adequate
decisions to safeguard the current position of the company. The inclusion of debt would
restrict the free cash flow of the organisation, which will improve the decisions of the
management. The free cash flow hypothesis in terms of dividends directly indicate that the
management would increase the level of dividend payment when higher free cash flow is
obtained by the organisation, while reduces the payment during low free cash flow.
Clientele Effect:
The firm’s past dividend policy relevantly determines the level of clientele, which
they will have over the period of the investment. The preference of the clientele and investor
are relevantly different in terms of dividends, where the changing dividend policy of the
organisation will directly alter the number of investors interested in the organisation. The
investors and clientele will prefer the organisation with their anticipated dividend policy
condition, which might negatively or positively affect the share price movement of the
company.

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CORPORATE FINANCE ASSIGNMENT
b) Briefly discussing five reasons behind comparing choosing for repurchase than
dividend under classical tax system:
The major five reasons behind the organisation choosing the repurchase condition that
dividend is depicted as follows.
 The organisation mainly takes repurchases, when their actual calculation of its share price
is low, as the initiation would eventually allow the organisation to boost its share price
value.
 The second major reason is the tax benefit, which will be taken by the organisation when
initiating the repurchase system, as it will provide tax advantages in comparison to the
dividends that will be provided to the investors.
 The third reason is for offsetting the dilution, which incurs due to the exercising of
options, as it increases the number of shares. Hence, the repurchase mainly reduce the
dilution present for the organisation.
 The fourth major reason behind the repurchase of stock is reduction in supply of current
shares, as it allows the organisation to increase their share value and maximises the share
value.
 The fifth major component of repurchase condition for the organisation is the executive
compensation, which has been used by the organisation. The executives would eventually
want to conduct repurchase, as it would eventually raise the level of share value and
compensation amount.
c.i) Identifying dividend change announcement of the organisation:
Balance Date Dividend Type Cent Per Share Dollar per share Percentage change
30/06/2018 Final 34.14 0.3414 13.88%
30/06/2017 Final 29.98 0.2998 -3.17%
30/06/2016 Final 30.96 0.3096 -0.74%
30/06/2015 Final 31.19 0.3119 41.77%

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CORPORATE FINANCE ASSIGNMENT
30/06/2014 Final 22.00 0.22 0.00%
30/06/2013 Final 22.00 0.22 7.32%
30/06/2012 Final 20.50 0.205 7.89%
30/06/2011 Final 19.00 0.19 8.57%
30/06/2010 Final 17.50 0.175
c.ii) Calculating the three-day return earned by the firm for the period:
Stock Return
20-
Aug-
18
14-
Aug-
17
15-
Aug-
16
10-
Aug-
15
18-
Aug-
14
20-
Aug-
13
14-
Aug-
12
15-
Aug-
11
3-day return before
the announcement
-
0.18% 0.42%
-
2.38%
-
2.17% 0.42% 0.71% 0.80% 5.37%
2-day return before
the announcement
-
1.03% 3.59% 0.20%
-
1.32% 0.96% 0.38%
-
0.58% 2.26%
3-day return after the
announcement
-
8.79% 0.79%
15.96
%
-
13.01
% 3.62% 4.97% 5.83% 5.27%
2-day return after the
announcement
-
8.16% 0.14%
14.90
%
-
12.73
% 3.95% 4.12% 6.59% 4.87%
c.iii) Calculating the market return for the corresponding periods:
Market Return
20-
Aug-
18
14-
Aug-
17
15-
Aug-
16
10-
Aug-
15
18-
Aug-
14
20-
Aug-
13
14-
Aug-
12
15-
Aug-
11
3-day return before
the announcement 0.63% 1.52%
-
0.18%
-
3.69% 0.66%
-
0.75%
-
0.54% 3.45%
2-day return before
the announcement 0.16% 0.90%
-
0.03%
-
3.31% 0.94%
-
0.67%
-
0.48% 0.72%
3-day return after the
announcement
-
0.46%
-
0.09% 0.47%
-
2.27% 1.36%
-
0.19% 0.10% 2.71%
2-day return after the
announcement
-
0.67%
-
0.55%
-
0.01% 0.01% 1.06%
-
0.24%
-
0.06% 1.87%
c.iv) Calculating the excess returns:
Excess Return
20-
Aug-
18
14-
Aug-
17
15-
Aug-
16
10-
Aug-
15
18-
Aug-
14
20-
Aug-
13
14-
Aug-
12
15-
Aug-
11
3-day return before
the announcement
-
0.81%
-
1.10%
-
2.20% 1.51%
-
0.24%
-
0.75% 1.34% 1.93%
2-day return before
the announcement
-
1.20% 2.69% 0.24% 1.99% 0.02%
-
0.67%
-
0.10% 1.53%

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CORPORATE FINANCE ASSIGNMENT
3-day return after the
announcement
-
8.32% 0.89%
15.49
%
-
10.74
% 2.26%
-
0.19% 5.73% 2.56%
2-day return after the
announcement
-
7.49% 0.69%
14.91
%
-
12.74
% 2.89%
-
0.24% 5.73% 3.00%
c.vi) Discussing the relevant theory with the finds:
The calculations conduced in the above table depict the impact of different theories,
which have impact on share price movement of the Ansell organisation. In addition, the
increment in dividends of the organisation is mainly detected, which supports the signalling
element theory, as the investor was able to understand the level of dividends, which will be
provided by the management. Furthermore, the share price of Ansell relevantly responded to
the dividend declared by the management, where rising dividends would boost shares, which
declining dividends would reduce the share values during 2017. The information content,
signalling element and dividend policy theory is relevantly supported by the share price
movement of Ansell Limited. The share price movement of the organisation during the
dividend announcement is not affected by the market movement.