Since the change is being requested by shareholders

  • No School
  • AA 1
  • 24

This preview shows page 16 - 23 out of 24 pages.

since the change is being requested by shareholders, there is a good chance that this may not happen. The f inancing policy is likely to change since there will be less internally-generated funds available , so Limni Co may consider taking on additional debt finance and therefore will have to look at the balance of business and financial risk. This could in turn change the risk management policy as interest rate risk will also have to be managed as well.
Image of page 16
Copyright © ACCAspace 中国 ACCA 特许公认会计师教育平台 17 Limni Co 45mins (b) Theta Company Theta has a fixed dividend payout ratio of 40%. As a result the increase in dividends in recent years depends on the increase in profit after tax in these years rather than increasing at a steady rate, which is often preferred by shareholders. If profit after tax was to fall, Theta may reduce its dividend, which could send the wrong signals to shareholders and cause significant fluctuations in the share price. To avoid this, Theta may keep a stable dividend in years of reduced profits.
Image of page 17
Copyright © ACCAspace 中国 ACCA 特许公认会计师教育平台 18 Limni Co 45mins Omega Company Omega has a policy of increasing dividends at approximately 5% per year , but earnings are only increasing at a rate of approximately 3% per year. This means the dividend payout ratio is increasing , it was 60% in 20X3 and is 65% in 20X7. Although this cannot continue in the long term, it suggests that there are less investment opportunities currently and Omega is reducing its retention ratio. This investment would be attractive to an investor looking for a high level of dividend income.
Image of page 18