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DIVIDEND POLICY, Corporate Finance

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The managing directors of three profitable listed companies discussed their company’s dividend policies at a business lunch.

Company A has deliberately paid no dividends for the past five years.
Company B always pays dividend of 50% of earnings after taxation
Company C maintains a low but constant dividend per share (after adjusting for the general price index), and offers regular scrip issues and shareholder concessions.

Each managing director is convinced that his company’s policy is maximising the shareholder’s wealth.

Required:
Discuss the advantages and disadvantages of the alternative dividend policies of the three, and the circumstances under which each managing director might be correct in his belief that his company’s dividend policy is maximising shareholder’s wealth. State clearly any assumptions that you make. [25 Marks]

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