Question Four

1. Dividend policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (past or present) that should be distributed to the shareholders of the corporation.

Discuss the theories of dividend policy and their implications on managerial decision making.

(9 marks)

2. Explain any three factors that should be considered when deciding the dividend policy to be implemented. (3 marks)
3. Consider Company XYZ that wishes to spend K150,000 on new projects and maintains 40% debt financing. If the forecasted net income is K120,000:

1. How much should the company pay out as dividends under the residual dividend model? (2 marks)
2. How would a drop in net income to K80,000 affect the dividend? (2 marks)

4. Explain two advantages and two disadvantages of the residual dividend model.

(4 marks)

(20 marks)