Submit here both your write$-$up and any spreadsheet or other quantitative analysis. I need to see your formulas so do not send a pdf or a numbers fileAdvanced Corporate Finance, Spring $2024$

Dividend Policy Case

Establishing RedBlack Tech's Dividend Policy and Initial Dividend

RedBlack Tech is a fast$-$growing medical device company that initially went public in early $2016.$ Its revenue

growth and profitability have steadily risen since the company's inception in late $2011.$ RedBlack's growth has

been financed through the initial stock offering, the sale of bonds in $2019,$ and the retention of all earnings.

Because of its rapid growth in revenue and profits, with only short$-$term earnings declines, RedBlack's common

stockholders have been content to let the firm reinvest earnings as part of its plan to expand capacity to meet the

growing demand for its products. This strategy has benefited most stockholders in terms of stock splits and

capital gains. Since the company's initial public offering in $2016,$ RedBlack's stock twice has been split $2-$for$-1.$ In

terms of total growth, the market price of RedBlack's stock, after adjustment for stock splits, has increased by

$700\%$ during the $8-$year period $2016-2023.$

Because RedBlack's rapid growth is beginning to slow, the firm's CEO, Bob Bishop, believes that its shares are

becoming less attractive to investors. Bishop has had discussions with his CFO, Jackie Martinez, who believes that

the firm must begin to pay cash dividends. She argues that many investors value regular dividends and that by

beginning to pay them, RedBlack would increase the demand $-$ and therefore the price $-$ for its shares. Bishop

decided that at the next board meeting he would propose that the firm begin to pay dividends on a regular basis.

Bishop realized that if the board approved his recommendation, it would have to both establish a dividend policy

and set the amount of the initial annual dividend. He had Martinez prepare a summary of the firm's annual EPS $-$

given in the following table.

Martinez indicated that she expects EPS to remain within $10\%($plus or minus$)$ of the most recent value during the

next $3$ years. Her most likely estimate is an annual increase of about $3\%.$ After much discussion, Bishop and

Martinez agreed that he would recommend to the board one of the following types of dividend policies:

Constant payout$-$ratio dividend policy

Regular $($flat$)$ dividend policy

Low regular and extra dividend policy

Bishop realizes that his dividend proposal would significantly affect future financing opportunities and costs and

the firm's share price. He also knows that he must be sure that his proposal is complete and that it fully educates

the board with regard to the long$-$term implications of each policy.

Analyze each of the three dividend policies in light of RedBlack's financial position.

Which dividend policy do you recommend? Justify your recommendation.

What are the key factors to consider when setting the amount of a firm's initial annual dividend?

How should Bishop go about deciding what initial annual dividend to recommend to the board?

In view of your dividend policy recommendation in $(2),$ how large of an initial dividend would you

recommend? Justify your recommendation.