Finance Earnings and Desire of Shareholders

Question: Discuss about theFinancefor Earnings and Desire of Shareholders. Answer: Stating the Factors that Might Influence Payment of Dividend: The main factors that might influence payment of dividend are magnitude of earnings, desire of shareholders, nature of industry, liquidity position, future requirements business risk and agency cost. These factors mainly affect the dividend payment policy of the company, which might help in generating demand among potential investors. Liu, Uchida Yang (2014) mentioned that companies with the consistent dividend payout are able to inflate their share price and generate high capital from IPO sale. On the contrary, Hernndez Junca (2015) argued that after the dividend payment, short-term traders mainly exit their position, which nominally reduces share price of the company. In addition, increasing profitability and general reserves mainly increase the expectations of the investor for higher dividends, which in turn inflates its share price. Moreover, investors for making an adequate investment decision mainly use the dividend payout ratio or yield. Commenting on Joe Smolinski's Suggestion for Not Paying the Dividend: Joe Smolinkskis main comment was that if it aint broke we should not fix it. This phrase mainly referred to the deteriorating divined policy of the company. The company should only take action if its dividend policy backlashes and hinders its growth prospects. Due to non-payment of dividends, the company share price has mainly fallen from $25 to $2 and is currently trading at $8. The past dividends are mainly used in the Gordon growth model by high-end investors, which depict the actual share price value of the company. The investors are not able to detect the actual value of companies share price that does not pay any dividend by using the dividend discount model. Li, He Tang (2014) argued that non-dividend payment companies have less debt accumulation as the dividend amount is reinvested in the company for improving its growth and generate higher return. Providing Relevant Explanation and Critically Evaluating the Jim Baker's Argument: From the case study, it could be evaluated that the company has been operating with shareholders money for 4 year and have not paid any dividend, which has drastically reduced its share price from $25 to $2. This drastic decline in share price value is due to the non-payment of dividends, which have decreased the interest of investors in the company. LUO WU (2016) mentioned that long-term investors mainly choose companies that provide consistent dividends, which might help in depicting financial stability and generate return from its investment. On the contrary, Coetzee de (2014) argued that short-term investors mainly evaluate the price movement and does not relate to the dividend policy of the company. The share price will suffer if the company does not pay the dividends this year as its shown promising returns and has been declining the demands of the investors. The non-payment of dividends could reduce the interest of the current investor and generate a massive sale of shares, which might negatively affect the current share price of the company. Pension funds, insurance companies and mutual funds investor hold 43% of the total shares of the company, which mainly relies on dividends. Thus, non-payment of dividends might instigate a major sell signal for the institutional investors and share price of the company might suffer in near future (De Mpinda 2013). Commenting on the Dividend Payment Debate Stated in New Wave Corporation: The company has been generating goods profits after the IPO issues but the directors of the company instead of providing dividends retained the profit for reinvestment in the business. However, the reinvestment decision of the directors was mainly fruitful during the troubles time that was faced by the company. This reinvestment policy mainly reduced the debt accumulation, which might have conducted during the economic downturn. Currently the share price of the company has declined from its previous high of $25, due to the unexpected downturn in the economy. However, the share price of the company increased from $2 to $8 but was not able to touch its previous high due to its no dividend policy. Viviers, Firer Muller (2013) mentioned that adaptation of no dividend policy mainly reduces its fiction in attracting long-term potential investors, which might provide the required capital to the company for achieving the targeted goals. On the contrary, Kao Chen (2013) argued that currentl y companies mainly use the debt accumulation strategy, which allows them to get extra exemption from tax and improve their profit retention capacity. Particular Amount Retained earnings 1,000,000 Cash 250,000 Total cash available 1,250,000 Investment needed 1,000,000 Cash balance 250,000 Cash retention 150,000 Dividend paid 100,000 Dividend per share 0.1 Table 1: Stating the dividend per share (Source: As mentioned in the case study) Bob McKay mainly commented on using the residual dividend policy method, which might help in supporting the companys capital structure requirements and improve its dividend yield. The table 1 could effectively depict the residual dividend policy, which might be used for improving the dividend yield of the company. Balachandran, Krishnamurti, Theobald Vidanapathirana (2012) argued that residual dividend policy portrays unstable dividend payment structure, which increase the risk of investment for investors. In this context, Giugale Nguyen (2014) further stated that investors mainly ignore companies with unstable dividend policy, which negatively affects its share price valuation. Particular Amount Retained earnings 1,000,000 Cash 250,000 Total cash available 1,250,000 Investment needed 1,000,000 Cash balance 250,000 Cash retention 150,000 Amount used for share buy back 100,000 Current share price 8 Number of share buy back 12,500 Table 2: Stating the number of shares bought back (Source: As mentioned in the case study) However, Edwin mainly stated that stock repurchase could be conducted after fulfilling the investment needs of the company. Companies to improve their overall EPS and project a healthy investment opportunity to the investors mainly use stock repurchase method (Liu, Uchida Yang 2014). The method could only help the company to repurchase 12500 shares in the current price, which might not help in creating the required demand for its stocks. On the contrary, Hernndez Junca (2015) criticises that stock repurchase does not help if the company invests in own stocks and cannot generate income from other source. After the evaluation of New Wave Corporation income and balance sheet statement, it could be found that the company has made adequate income this fiscal year. However, the investment of 1,000,000 is mainly needed and the retained income is 1,000,000. The company has not paid any kind of dividend to its shareholders after generating higher income from shareholders money. Thus, declaration of dividends could be helpful in generating interest of investors and boosts companies overall share price. Coetzee de (2014) mentioned that continuity in dividend declaration mainly allows companies to attract high-end investors, which might help in improving both share price and investment capital. The main reason behind the payment of dividends is the high-retained income and cash availability achieved by the company. Generally, there are five different type of dividend payment policy, which is adopted by the company. These dividend payment policies are effectively depicted as follows. Regular Stock Dividends: This type of dividend policy is mainly used by companies who needs the dividend amount to boosts its capital structure. The companies mainly provide stock dividends, which might reduce EPS of the company and hamper investors perception (Giugale Nguyen 2014). The stock dividends policy hampers the share value and investment capital, which might be generated from capital market. Regular Extra Dividends: The extra divined are only provided by companies that follow a stable dividend policy. The companies mainly pay extra dividends when there is an excess income attained during the fiscal year. These types of dividends are mainly used to companies to instigate demand among potential investors and increase their share price (Balachandran, Krishnamurti, Theobald Vidanapathirana 2012). No Immediate Dividends: This type dividend policy mainly adopted by the companies that are new and have huge capital needs. The dividend amount is mainly reinvested in the business for improving its capital structure. However, the company needs to pay bonuses in form of stocks, which might increase the dividend amount (Kao Chen 2013). Stable Dividends: The stable dividend policy is mainly adopted by the firms, which provide fixed income to its shareholders regardless of the fluctuation in its income. The primary focus of the company is to maintain the dividend rate, which might help in accumulating high end investors (Viviers, Firer Muller 2013). Irregular or Residual Dividend: Companies to support its capital structure needs mainly use irregular or residual dividend policy. This policy mainly uses the retained income for supporting its investment needs and the balance amount is paid to the shareholders. Li, He Tang (2014) mentioned that irregular dividend policy allows companies to reduce the investment expenditure, which might incur during the expansion process. New Wave Corporation could effectively use the residual or irregular dividend policy, which was depicted by Bob McKay. This policy could effectively help the company by supporting the capital expenditure needs during the expansion or capital restructuring process. Furthermore, high cash dividend could also be paid during the non-investment years, which could help investors maintain high level of interest in the company. Reference: Balachandran, B., Krishnamurti, C., Theobald, M., Vidanapathirana, B. (2012). Dividend reductions, the timing of dividend payments and information content.Journal of Corporate Finance,18(5), 1232-1247. Coetzee, M. S., de Wet, J. (2014). Dividend Tax, Dividend Payments and Share Values: A South African Perspective.Corporate Ownership Control,11(3), 242252. De Wet, J., Mpinda, M. (2013). The impact of dividend payments on shareholders' wealth: evidence from the Vector Error Correction Model.De Wet, JH vH. Mpinda, M, 1451-1465. Giugale, M., Nguyen, N. T. V. (2014). Money to the People: Estimates of the Potential Scale of Direct Dividend Payments in Africa.Center for Global Development, Policy Paper,43. Hernndez, C., Junca, M. (2015). Optimal dividend payments under a time of ruin constraint: Exponential claims.Insurance: Mathematics and Economics,65, 136-142. Kao, L., Chen, A. (2013). How product market competition affects dividend payments in a weak investor protection economy: Evidence from Taiwan.Pacific-Basin Finance Journal,25, 21-39. Li, W. X., He, T. T., Tang, G. Y. (2014). Ultimate control, expropriation and dividend payments: a reputation management perspective.Journal of General Management,40(2). Liu, C., Uchida, K., Yang, Y. (2014). Controlling shareholder, split-share structure reform and cash dividend payments in China.International Review of Economics Finance,29, 339-357. LUO, Q., WU, Z. (2016). Agency Problem between Controlling and Minority Shareholders and Corporate Cash Dividend.Journal of Management,3, 010. Viviers, S., Firer, C., Muller, C. (2013). A review of the dividend payments of South African listed companies during the period 1977-2011.Management Dynamics,22(4), 2.