# Corporate Finance : 638268

Question:

(a)
Market reacts positively to dividend increases and negatively dividend decreases. Three
explanations are provided for this notion.
i.
Information content (signalling) hypothesis,
ii.
Free cash flow hypothesis
iii.
Clientele effect
Discuss these hypotheses related to dividend policy.
(30 marks)
(b)
Briefly discuss five reasons for companies to choose repurchases rather dividends under a class
ical
tax system.
(30
Marks)
(c)
i.
Identify (interim or final) dividend change announcement using “dividend history from the
DatAnalysis Premium Database” for the company allocated to you for the assignment 2.
ii.
Calculate three day return earned by your firm for the period from the day before the
announcement continuing through the day after the announcement date; and two day return
earned by your firm for the period from the day of the announcement to the day aft
er the
announcement date
iii.
Calculate the market return for the corresponding periods in (ii).
iv.
Calculate the excess: (ii)
(iii)
v.
Check the results for any other two students in your tutorial class and report that result in your
assignment 2
vi.
Discuss the relevant theory with the findings in (iv) and (v).
(40 marks)
(30 + 30 + 40 = 100 marks)
Step 1
A dividend change is defined as the relative difference from the previous year’s level.
Interim dividend change = interim dividend per share in year
t
minus interim dividend per share
in year
t
1
.
Final dividend change = Final dividend per share in year
t
minus Final dividend per share in
year
t
1
.
Step 2
Announcement date for the d
ividend change can be identified from “ASX announcements from the
Announcement date for interim dividend change: use the announcement date of half yearly
report
Announcement date for final dividend change: use the announcement date of preliminary final
report
Select “ASX announcements”
select “Search option
and/or text search”
for Announcement Type: select periodic reports
for Sub
Announcement Type: select preliminary
final statement for final dividend; half yearly report interim dividend change specify the date  range.

Que a)

Miler and Modigliani has depicted into their study that a firm must not announce the entire profit as dividend. Firms are required to retain all the profits for further investment. Information content hypothesis depict that the firm’s top level management and board of directors of the firm known various private knowledge about the company which are helpful for the investors and analyst to analyse the market condition of the company[1]. Information content of dividend is a widely accepted theory of dividend. This theory further depict that the information is confidential and that is why it is better for the firm to announce more dividend so that investors get attracted towards the company. This theory forces over the irrelevant theory of dividend.

Further, free cash flow hypothesis of dividend depict that the bigger debt level of a company disciplines the managers and the directors of the company through pushing them to make some fixed payments of the debt service and by reducing the level of the cash flow of the company. This theory forces over the irrelevant theory of dividend. This theory further depict that the investors look over the entire cash flow of the company before investing into the company[2].

Lastly, Clientele effect theory of dividend depict that the firm’s stock price always move and vary according to the goals and demand of the analyst and investors in context with the tax, dividend announcement and other changes into the policy. This effect assumes that particular investors are attached with a company’s dividend policy and once it would be changed they will switch. So the firm must make the changes into its dividend policy accordingly[3]. And firm must pay the dividend amount on regular basis to the investor to make them motivate.

Que b)

Why should company chose repurchase:

If a company repurchase its stock than company becomes eligible for getting the tax advantage and this is the biggest reason due to which companies prefer to repurchase their shares.

Signalling:

The repurchase of the shares give a signal in the market about the position of the company and due to which more investors get attracted towards the company[4].

Managerial flexibility:

Managerial flexibility is the main reason due to which company prefers to repurchase the share as the buyback manages and make the managerial activities of the company more attractive to manage entire process of the company.

Increase financial leverage:

If a company repurchase its stock than company the financial leverage position of the company is enhanced by a great level and this is the biggest reason due to which companies prefer to repurchase their shares[5].

Offset dilution:

Buying back the shares of the company offset various issues and dilutes of the company and enhances the position of the company and this is the biggest reason due to which companies prefer to repurchase their shares.

Que c)

Identify the dividend change:

1. Interim dividend change:

Interim dividend change of the company is 1.40056 according to the Nov 29, 2016 and the Nov 27, 2015.

 Grain Corp limited Changes Interim dividend 0.05 0.0357 1.40056

1. Final dividend change:

Final dividend change of the company is 2.00013 according to the Jun 30, 2016 and the Jun 30, 2017.

 Grain Corp limited Changes Final dividend 0.2143 0.107143 2.00013

[6]

Day return:

The Final dividend declaration of the company has been in Jun 30, 2016 and then Jun 30, 2017. Share price of the company has been analyzed from Jun 30, 2016 to Jun 30, 2017. The day return of the company has been given in the appendix. The average return of the company is 0.000258464.

Market return:

The market dividend of the market has been analyzed from Jun 30, 2016 to Jun 30, 2017. The day return of the market has been given in the appendix. The average return of the market is 0.000128.

Excess:

Through evaluating the market return and day return of the company, it has been found that the day return of the company is more than the market return. The difference between both the returns is of 0.0001307.

Analysis of other’s result:

The result of other student’s has also been analyzed and it has been found that my friend’s result is almost similar to my result. The bit difference in company return has occurred due to different companies. The market return is same.

Relevant theory:

Capital market theory has been evaluated to analyze the above result. This theory depicts that the investor could analyse the market through analysing the market return and the company return of a company. All investors    must be the effectual investors and the borrows the amount for investment on the risk free rate. This theory also depict that there are no transaction cost and tax are applied over the investment amount of a company.   No inflation rate are exist according to the capital market theory.
References:

Denis, D.J. and Osobov, I, Why do firms pay dividends? International evidence on the determinants of dividend policy, Journal of Financial economics89(1), pp,62-82, 2008.

Nizar Al-Malkawi, H,A, Determinants of corporate dividend policy in Jordan: an application of the Tobit model, Journal of Economic and Administrative Sciences23(2), pp,44-70, 2007.

Chung, D,Y,, Isakov, D, and Pérignon, C, Repurchasing shares on a second trading line, Review of Finance11(2), pp,253-285, 2007.

Wiemer, J, and Diel, S, Strategies for share buybacks, Journal of Corporate Treasury Management1(4), 2008.

Al-Kuwari, D, Determinants of the Dividend Policy of Companies Listed on Emerging Stock Exchanges: The Case of the Gulf Cooperation Council (GCC) Countries, 2009.

[1] D.J. Denis, and I, Osobov, Why do firms pay dividends? International evidence on the determinants of dividend policy, Journal of Financial economics89(1), pp,62-82, 2008.

[2] H. A., Nizar Al-Malkawi, Determinants of corporate dividend policy in Jordan: an application of the Tobit model, Journal of Economic and Administrative Sciences23(2), pp,44-70, 2007.

[3] D. Al-Kuwari, Determinants of the Dividend Policy of Companies Listed on Emerging Stock Exchanges: The Case of the Gulf Cooperation Council (GCC) Countries, 2009.

[4] D,Y, Chung, D, Isakov, and C, Pérignon, Repurchasing shares on a second trading line, Review of Finance11(2), pp,253-285, 2007

[5] J., Wiemer, and S., Diel, Strategies for share buybacks, Journal of Corporate Treasury Management1(4), 2008.