In your discussions with the CFO, you have talked about the impact of a dividend on your firm’s market price and financial statements. He has asked that you and your team evaluate the impact of issuing a dividend.
Your starting point for analyzing dividends is the Modigliani-Miller (MM) Theorem. If MM assumptions are true, what would be your recommendation for dividends?
Now assume that the only MM assumption that is not true is that payments to debt holders may be deducted as an expense for tax purposes, what would be your recommendation for dividends?
Now assume that the rate of long-term capital gains is lower than the marginal income tax rate for your equity holders, what would be your recommendation for the choice between dividends and share repurchase?
Moving on from MM, now use the income statement and balance sheet provided to make a recommendation for the amount of dividend (if any). How are retained earnings impacted and what does this mean for the organization?
Concept Check: Dividends are distributions of profits to your investors who placed their capital at risk for you. Theoretically, every company should eventually provide a dividend distribution to their investors.
Helpful Hint: Dividends are voted on every quarter by the Board of Directors for a company; the amount of the dividend or if any is paid can be decided at that time.
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