Question $3$ Setting Dividend Policy

You are working in the Financial Consultancy Department of a large investment

bank. One of your clients, Aungier plc$,$ has sought your consultation on the likely

impact its proposed dividend policy for $2024$ will have on its shareholders.

Specifically, Aungier requires you to advise on the factors that are likely to underpin

the response of some of its shareholders to the proposed dividend policy, and if

appropriate, to recommend an alternative dividend policy that would fit with its

investment and financing activities. As such, you have gathered the following

information in relation to the firm:

$2023202220212020$

Dividend Per Share $1\mathrm{.}501\mathrm{.}501\mathrm{.}501\mathrm{.}50$

$\%$ of Shares Owned by Institutional

Shareholders $5\%$

$\%$ of Shares Owned by Retail Shareholders $95\%$

$$ In $2024$ Aungier plc is proposing to invest in a major project with a positive

NPV$.$ The project would be financed partially by the sale of new shares and

partially by funds released via a reduction in the dividend per share. The new

dividend per share in $2024$ would be $0\mathrm{.}40.$

$80\%$ of the firm$$s retail shareholders are retired individuals.

$$ The shares in Aungier plc are highly illiquid.

$$ The firm$$s leverage ratio is $10\%,$ whilst the industry average leverage ratio is

$30\%.$

$$ Dividends are taxed under the PAYE tax system, where income up to $40,000$

is taxed at $20\%$ and income over $40,000$ is taxed at $40\%.$ The capital gains

tax rate is $33\%.$

Required:

Write a report for Aungier plc in which you outline the likely response of its retail

shareholders to the proposed dividend policy, and explain the factors you believe will

underpin this response. Make recommendations as to the dividend policy the firm

should adopt in $2024$ and the manner in which the project should be financed. Justify

the recommendations you make.