Dividend Decision & Management of WC

• Investor returns consist of both capital gains and dividend returns.
• Companies must strike a balance between providing shareholders with a satisfactory dividend return and investing retained earnings for future growth.
• If a company pays high dividends, less money is retained in the company for investment purposes.
• When the company requires equity finance, new shares will be issued which will dilute the market value per share.
• Future growth in the share price is sacrificed and investors get their return in the form of dividends.
• The dividend pay-out ratio measures the percentage of earnings paid out as a dividend: Dividend pay-out ratio = dividends / earnings.
• Methods of relieving cash flow problems include ensuring debtors are invoiced promptly, offering settlement discounts to debtors, handing over long outstanding debtors to external collectors, factoring debtors (very expensive), increasing bank overdraft, reducing inventory levels/ increasing inventory turnover (by increasing sales) thereby decreasing holding costs, delaying creditor payments without damaging relationships with suppliers, selling assets that are not earning sufficient returns, entering into sale - and - leaseback transactions, not paying dividends, not undertaking (or extendin
• Excessive cash holdings can have a negative impact on profitability due to the low return earned.
• The dividend cover indicates the ability of the company to pay dividends and the likelihood of a cut.
• The dividend cover is the inverse of the dividend pay-out ratio: Dividend cover = earnings / dividend.
• The dividend yield indicates the return that shareholders derive on their investment.
• The dividend yield is driven by the dividend paid and the share price: Dividend yield = dividend / market value of equity.
• The dividend payment methods include a stable dividend in Rand terms, which attempts to pay dividends that are sustainable.
• Dividends remain stable and are only increased when earnings show long-term sustainable growth.
• The constant dividend pay-out or cover ratio means that dividends are a constant percentage of earnings and will fluctuate with any change in earnings.
• Shareholders view a fluctuating dividend policy as more risky than stable dividends which they are more likely to receive.
• Shareholders require a higher return where dividends fluctuate and the cost of capital of companies with a fluctuating dividend policy is higher.
• This occurs when a company has high cash reserves and no immediate investment opportunities.
• The journal entry for a scrip dividend is: Dr Retained earnings xxx Cr Stated capital xxx.
• Businesses may choose to finance their current assets through short-term or long-term finance.
• The shareholding of investors who select the cash option will be diluted.
• It is preferable to finance current assets using short-term finance.
• The use of long-term finance may reduce competitiveness as the business may have less financial capacity for long-term growth.
• If working capital levels are too low this could result in out of stock situations, lost sales or inability to meet essential cash commitments.
• Working capital management involves the management of current assets and current liabilities with the aim of maintaining these at efficient levels.
• On the other hand, if working capital levels are too high the company will not generate sufficient returns and inventory holding costs will be exorbitant.
• Instead of paying a dividend, a company may choose to repurchase some of their shares.
• The total value of the company is not influenced and there will simply be more shares in issue, each with a lower value, making up the same total.
• The total market value of the company does not change as a result of a scrip dividend, however, because there are more shares in issue the market value per share will decrease.
• The shareholder does not benefit as they retain exactly the same percentage of issued share capital.
• A scrip dividend is different to a capitalisation issue where a shareholder is not given an option to select cash.
• A special dividend is paid in addition to normal dividends when a company has high cash reserves and no immediate investment opportunities but they do not want to repurchase their shares.
• The effect of a capitalisation issue is to increase the number of shares that each shareholder holds, each share is then simply worth less.
• Shares repurchased may be cancelled (very seldom) or held as treasury shares.
• Machines must be maintained to encourage a zero breakdown policy in a JIT process.
• Just in Time (JIT) is a process that aims to reduce inventories to as low a level as possible and by doing so reducing costs and improving profitability.
• In a JIT process, products are produced with zero defect and no product is re-worked.
• Most South African factoring contracts are on a " with - recourse " basis, meaning that the ultimate bad debt risk remains with the company.
• The cost of not taking the discount offered by a creditor is calculated as Discount / (100 - discount) x 365 / n.
• Credit given by an organisation’s suppliers is a type of financing that arises naturally from normal operations.