CASE STUDY - MANAGEMENT OF CORPORATE PAYOUT POLICY

Background:

Payout structure refers to the way a corporation distributes free cash flow to shareholders, either through dividends or repurchases. Each form has its benefits and drawbacks and firm managers attempt to find the perfect payout policy in terms of risk/reward payoff for shareholders.

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Objectives:

1. To explore the tension between investment policy and financial policy with respect to the sources and uses of cash.

2. To explore the financial and investment implications of dividend and share repurchase decisions through signalling and clientele effects.

3. To explore the ethical implications of financial policy in light of their takeover risk.

Task:

Typically, EMI declared and paid dividends twice a year: an interim dividend of 2p per share and a final dividend of 6p per share (total 8p per share every year). In November 2006, EMI, a British music company, declared an interim dividend of 2p per share to their shareholders. In early spring 2007. Martin Stewart, CFO of EMI, was considering whether to declare a final dividend of 6p per share (i.e. maintain the annual dividend of 8p per share) for the fiscal year 2007.

It is your task to analyse and recommend the optimum payout policy for EMI. In particular, should EMI pay out dividends (if so, the recommended amount) or repurchase shares (or none). Your response should cover (but not necessarily limited to) the following questions:

1. What happens to EMI's financing need (capital structure) if:

• Do not maintain dividends of 8p-per-share, which means only the interim dividends of 2p-per-share will be paid?
• Maintain dividends of 8p-per-share?

2. How might EMI's various providers of capital, such as its shareholders and creditors, react if EMI were to adopt each of the above dividend policy?

3. How might EMI's various providers of capital (shareholders and creditors) react if EMI were to repurchase its shares?

4. "...there continued to be considerable outside interest in taking over EMI." Discuss how EMI's payout policy decision could be used to deter or facilitate any takeover proposals.

5. What are some of the ethical implications that could arise if EMI used its payout decision to deter a takeover?

6. What should Stewart do in regards to the payout decision?

Length: Max 1000 words, excluding figures, tables, and references.

Assignment link - https://www.dropbox.com/s/pewqshz7oylv26w/Assignment.rar?dl=0.