Financial Management Report: Dividend Policies and Brexit Implications

This report delves into financial management, exploring the significance of financial management in organizational decision-making. It examines dividend policies, including relevant and irrelevant perspectives, such as Walter's Model, Gordon's Model, and the Modigliani Miller Model, to provide a co...Read More

Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................3
CONCLUSION................................................................................................................................4
REFRENCES...................................................................................................................................5

INTRODUCTION
Financial management helps the organisation to manage its financial resource and helps the
management to take the necessary decisions for the organisation (Parker, 2012). It helps the
managers to keep track of the usage of funds. It is very necessary for the organisation to keep
track of its funds so that it can see that their funds are properly utilized or not. This report
consists of the importance of financial management in the decision making process and the
methods. Financial management gives the opportunity to the organisation to manage the proper
utilisation of the fund more effectively and efficiently.
TASK 1
Dividend: Dividend is the portion of the net profit which is shared with the shareholders
who have invested their money in the business operations of the company (Abor and Bokpin,
2010). Distribution of the dividend is called as one of the most crucial decision for the finance
department as the funds are released by the finance department. Retained earnings are the
earnings which are retained by the company as the part of profit for future reserves and
expansion plans these earnings can be utilized by the company in many forms. Dividend policy
is necessary for the company to show the growth and the earning per share value for the
investors so that they invest more in the capital.
The dividend policy is explained as under:
Relevant Perspectives on Dividend Payment: Relevant perspectives on dividend is the
value of the firms that affects the dividend policy of the company. The dividend pay-out ratio
directly affects the value of the firm. If there is any change in the market value of the firm it is
assumed to be due the change in the dividend pay-out ratio.
Following are the theories which support the relevant theory of dividend policy:
Walter’s Model (Relevant Theory): Walter’s model states that if the company decides
to change its dividend pay-out ratio then it will affect the value of the firms as the changes in the
dividend pay-out ratio can be considered as negative or positive (Brusca, Gómez‐villegas and
Montesinos. 2016). If the company increase the pay-out ratio, then it is considered as a positive
change in the market value of the company. If the company decreases the dividend pay-out ratio,
then it is assumed to have a negative impact on the dividend pay-out ratio. The model given by
the Walter is based on the certain assumptions such as if the firm’s finances are total depended
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on the retained earnings only, the cost of capital of the firms and the internal rate of return of the
company is constant and also if the firm’s earnings are distributed as the dividend or it is re
invested in the firm internally. According to the above given theory, the dividend policy
considered to be the optimum if the relationship between the cost of capital and the internal rate
of return.
Gordon’s Model: This model states that the dividends are relevant, this model states that
the dividend policy which affects the firm are based on certain assumptions which states that the
dividend are the key factors to determine the image and the growth of the company (Shepard and
e.t. all, 2013.). Factors which are assumed in the theory are that the firm has all the equity in their
capital its means no debts, also it is assumed that the all the funds are of the internal and no
capital is borrowed from the outside sources, it is also assumed that the internal rate of return of
the company is remained constant. As per this theory when the internal rate of return is more
than the cost of capital the price of each share will be increased if the dividend pay-out ratio is
decreased. The optimum dividend pay-out ratio for the normal firms is achieved when the
internal rate return is equal to the cost of the capital.
Irrelevant Perspectives on Dividend Payment: This irrelevant perspective on dividend
payment theory states that the investors who have invested their money in the firm’s capital does
not have to worry about the company’s dividend policy as the investors have the option to sell
the shares whenever they want the cash in the open market (Portes and Forte. 2017). This theory
also indicates that the company’s dividend pay-out ratio does not affect the firm market value as
the investors have the option to sell their part of the holdings in the market when they require
cash. Following are some theories which helps to understand the irrelevant dividend payment
policy:
Modigliani Miller Model: According to this theory given by Modigliani Miller, the
dividend pay-out policy of the firm is irrelevant to the company’s market value and it does not
affect the wealth of the shareholders who has invested their money in the company for its
operations and other purposes. This model was based on the certain assumptions which validates
that the increase or decrease in the dividend pay-out ratio does not affect the market value of the
company and does not affect its growth and the company’s position. It is also assumed that the
securities issued by the company are not divisible and the investors who have purchased these
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securities cannot be influenced by the market value of the company. Flotation cost according to
this theory does not exist.
Residual Theory: Residual theory is used by the companies when they calculate the
dividends to be paid to the investors who have invested the money in the company. While using
this theory the company sets the priority to use the retained earnings to the capital expenditures
in the cash flow and the dividend is paid by the remaining reaming earning generated from the
revenue earned by the company.
TASK 2
The challenges posed by the BREXIT for the finance department of the companies involved
only in the business of funding other companies. The challenges which can be raised due to the
BREXIT can be both Negative and Positive. These negative and positive challenges are
described in details as follows:
NEGATIVE IMPLICATIONS: BREXIT has many negative implications on the financial
sector as after the exit of the Britain from the European Union will highlight the following the
negative impact on the financial sector:
Loss of pass porting Rights to EU market: pass porting is considered as the process by
which the British based financial institutions can sell their products and services to the rest of the
European Union without obtaining the licences and the regulatory approval and also it will be
easy for the Britain companies to set up their local subsidiaries in the EU. The large amounts of
financial institutions will be setting up their headquarters in London.
Loss of revenue by Financial Sectors: the main negative impact given by the BREXIT will
be the loss of the revenue in the financial sectors as it is not yet confirmed that the BREXIT will
be signed (Armour, 2017). If this happens this will bring a huge downfall in the capital of the
companies working in the other parts of the European Union. As the Free entry in the European
Union was banned by the committee which will result in the downfall of the economic
conditions of the country and also the loss will be suffered by the financial sectors. The invested
capital in the companies will be struck due to the ban of free entry of the new companies in the
EU. It is very difficult to manage the organisations as the free entry is banned. The organisations
have set up their headquarters in London and the production units are set up in the other
countries such as the Romania and Bulgaria, and it is difficult to manage the organisation from a
distance.
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Rise in the cost of Production: The cost of production will rise due to the BREXIT as the
entries will be banned in the European union and the productions units are set up in the countries
where the cost of raw material and the production is considerable low than it is in Britain. The
increasing cost will create the problems for the companies and the economy of United Kingdom.
This will result in the loss of jobs and slow productivity of the companies established in the
London.
Positive Implication of BREXIT: BREXIT have both the positive effect and the negative
effect but the positive is lower than the negative effects (Dörry, 2017). BREXIT has very few
positive effects as described the positive effects are that it will decrease the overcrowding of the
United Kingdom which has a direct impact on the economy of the country at a larger scale. As
the skilled labours and workers who are currently working in the different countries of the EU
will be brought back to the London after the BREXIT is signed, which will help the Britain
Based companies to increase the quality of the products. After the signing of the BREXIT will
help the HR mangers to find the right talent for their companies. It will also help the finance
departments to keep the proper track of the funds as the funds will be invested only in the Britain
based companies.
The second positive impact of BREXIT is that the problem of the multi-currency will be
solved. There were many problems faced by the finance departments related to the conversion of
the currency from euro to pounds and vice versa. The another positive impact will be the saving
of at least 7 billion pounds which the UK government has to pay to the European union as the
membership fees. This savings in the government’s budget will help the countries government to
set up new plants and industries in the country which will help the country’s economy to grow.
CONCLUSION
The above report contains the benefits of the finance departments in the organisation and
how they help the organisation to improve its efficiency in order to stay in the competition. This
report also covers the positive and negative impact of the BREXIT on the economy of the United
Kingdom. From the above report it is concluded that various different models are used by the
companies to pay-out the dividends. From this report it has been analysed that the various
theories have been given by the different scholars for the payment of the dividend to the
investors who have invested the money in the company’s capital.
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REFRENCES
Books and Journals
Parker, L. D., 2012. From privatised to hybrid corporatised higher education: A global financial
management discourse. Financial Accountability & Management. 28(3). pp.247-268.
Abor, J. and Bokpin, G. A., 2010. Investment opportunities, corporate finance, and dividend
payout policy: Evidence from emerging markets. Studies in Economics and
Finance. 27(3). pp.180-194.
Brusca, I., Gómez‐villegas, M. and Montesinos, V., 2016. Public financial management reforms:
The role of IPSAS in Latin‐America. Public administration and development. 36(1).
pp.51-64.
Shepard, J. and e.t. all, 2013. Financial impact of surgical site infections on hospitals: the
hospital management perspective. JAMA surgery. 148(10). pp.907-914.
Portes, J. and Forte, G., 2017. The economic impact of Brexit-induced reductions in
migration. Oxford Review of Economic Policy. 33(suppl_1). pp. S31-S44.
Armour, J., 2017. Brexit and financial services. Oxford Review of Economic Policy. 33(suppl_1).
pp.S54-S69.
Dörry, S., 2017. The geo-politics of Brexit, the euro and the City of London. Geoforum. 85.
pp.1-4.
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