By Tony Graham
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CIMA examination perform Kits consolidate studying by means of supplying an intensive financial institution of perform questions. every one answer presents a close research of the proper resolution and highlights why the choices are wrong. CIMA examination perform Kits are perfect for scholars learning independently or attending a tutored revision direction.
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B) Appropriateness of policy (i) Generally financial institutions prefer large dividend payouts, as it is beneficial from a tax perspective. Tax on dividend income is not as high as for capital gains, when shares are sold, and for some organisations may be nil. In addition, selling shares will involve transaction costs. Dividends here so far followed a steady upward trend, but have been maintained at roughly 40% of earnings so that the trend can be continued even if earnings dipped. Raising the payout ratio may mean that the company is unable to maintain this indefinitely and a year with low earnings may lead to a drip in the dividend.
Assessment 27 In ML, there appears to have been investments and funding as follows: In £m 2000 2001 2002 2003 Investment Funding Cash retained New equity New debt Dividends 190 260 100 290 NA NA NA 50 160 – 100 55 – – 250 55 190 600 (500) 70 It would therefore appear that the dividends are kept in place and steady growth allowed, while issuing new debt annually when needed to make up the cash required for investment. This accesses outside finance in the cheapest way, but ML reduces the risk to shareholders engendered in a high gearing level by periodically raising more equity to lower the debt level.
A low or nil dividend will tend to suggest a struggling company as investors will not have full information about the projects the company has decided to undertake instead. 29 30 Exam Practice Kit: Management Accounting Financial Strategy • The theory assumes that investors who need cash will be able to sell shares at the higher value and will be no worse off in total (cash in hand ϩ value of shares held). However, transaction costs mean investors are not indifferent between income and capital gain.