Payout Decision and Working Capital
Subject: Business / Finance
Question
Payout Decision and Working Capital
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This question provides an opportunity to get some hands-on experience applying corporate finance theory and models to real firms. In the process,students will get a chance to analyse a company’scorporate payout policy toits shareholders and thereby concludewhich policy(cash dividends or sharerepurchases)the company had applied.Choose three companies from the same industry of the FTSE 100 companiesfrom London Stock Exchange.
Required:
a)Analyse the corporate payout policy to shareholders for each of the three companies for the financial year 2010-11, 2011-12 and 2012-13.
b)Critically evaluate the strategy applied for financing the payout for each of the three companies overtime i.e. is it from retained earnings, excess cash, or financed through debt.
c)In your opinion, which company has the most effective and efficient payout policy in last three observed years? Provide your arguments and support them with theory and articles from few finance journals.
d)Critically discuss if the payout policy observed by all the three firms above is an ‘outcome’of an efficient working capital management so as to reward the shareholders or merely a ‘substitution’of a poor working capital management and therefore payout is a tool to misguide the shareholders. You have to discuss the two aspects in vein with the outcome and substitution hypothesis of payout policy discussedin ‘La Porta et al., 2000. Agency problems and dividend policies around the world. Journal of Finance 55, 1-33’.
