Many Australian companies with a history of paying regular cash dividends, delayed, cut, or stopped paying dividends in mid-2020. many started paying dividends again late in 2020 or in early 2021.

1.    discuss the likely impact on the share price of the information in a company's announcement about the restart of regular dividends.

2.    explain what would have happened to the share price on the company's ex-dividend date, assuming no other events.

3.    assume an Australian company with the following characteristics:

l      volatile earnings

l      high issuance costs

l      most company taxes paid outside Australia

i. Assess the appropriate level of dividends for this company. Clearly explain your reasoning.

ii. If the company was to pay dividends, which type of payout policy would you recommend it use and why?

Answer rating: 100% (QA)

The announcement of the restart of regular dividends is likely to have a positive impact on the share price of the company This is because dividends are an important factor in determining the attractiveness of a companys stock to investors Dividends provide a regular income stream to shareholders and are often seen as a sign of financial stability and confidence in the companys future prospects Therefore when a company announces the resumption of regular dividends it sends a positive signal to the market about the companys financial health and can lead to an increase in demand for its shares resulting in a higher share price On the companys exdividend date assuming no other events the share price is expected to decrease by the amount of the dividend payout This is because investors who purchase shares on or after the exdividend date are not entitled to receive the upcoming dividend payment Therefore the share price adjusts downwards to reflect the reduced value of the investment i Given the volatile earnings and high issuance costs of the company it may be appropriate to adopt a conservative dividend policy that prioritizes financial stability over high dividend payouts The appropriate level of dividends would depend on the companys financial position future growth prospects and cash flow requirements A company with volatile earnings and high issuance costs may need to retain a significant portion of its earnings to fund future growth and avoid excessive debt Therefore a lower dividend payout ratio may be more appropriate for this type of company ii If the company decides to pay dividends a ... View the full answer