Divided Strategy Coursework (Coursework Sample)

Dividend strategy, theories and dividend policy
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INTRODUCTION
The paper assesses the dividend strategy chosen by the Aberdeen asset management Plc which deals with asset management globally. The organization invests in equity financing, property, fixed income. The company trades in 26 countries and has 33 operating offices equipped with 2200 staff members. The board of director's, advocates for a dividend policy of 10% per share which will constitute a total dividend payment of 16% per share. However, the board still advocates a progressive dividend policy. The investment decision is viable at the present as it has been providing a real service to the company’s customers in the long term.
Question 1
The use of equity financing is good as the company can use its cash as well as those of the investors in the initial stages of business and their initial cost rather than settling huge debts to banks, customers and stakeholders. The company will be able to maintain its daily operations without trouble of settling debts. The use of the equity financing is a valid approach as the prospectus will be used to explain to investors about the state of their money. The prospectus advices the investors about the risk of their money in a brand new initial business where they will understand that in case the business fails they will not have their money back. Equity financing will be essential as the investors will offer advice to Aberdeen asset management which it would not have had in the past. (Arnold, 2005)
Changes made to investing in equity financing, will have adverse implications on the company as it will not access any profits in the initial stages of business. Changes in the financing method will mean that the company will pay back all the debts of the investors and even require it to use its own cash to settle the investor’s debt. Debt financing will put the company in a deficit position, and lack of profit will make the investors lack their profits. Another impact of the changing the way of financing is that Aberdeen asset management Plc will be have to act at all times in the interest of the shareholders. It means that any breach of the contract will be a legal consequence. The company will enter into much paper work where it operates asset management to many investors. It will thus be prudent for a company to get some advice from the Securities and Exchange Commission to know the requirements on dividend strategy before entering into more trading operations with investors. (Rich, 2012) The change on the method of financing will be caused by the need to have more funds thus Aberdeen will seek to find new ways of getting funds such as debt financing. The company will need the investors who will give it the loans and thus incur debts thus it needs to pay in the future depending on the terms and conditions. The need for a higher profit margin will be another cause of a change in the financing method thus Aberdeen will be required to use debt financing to get more money for investing. (Emery et al, 2004)
Dividend calculation using investment ratios
Aberdeen will use the investment ratios which will be a guide to investors whether to have a stake with the organization or not. The equity shareholders will also use the investment ratios result to determine the viability of investing in the company’s ordinary shares. The investment ratios will include; earning per share, dividend payout ratio, dividend cover ratio, dividend yield ratio and price earnings ratio. (Arnold, 2005)
Earnings per share
The earnings per share ratio will show the earnings per each ordinary share traded. In this case, the company being a public limited company limited by shares and trades its securities public presents in its annual report the basic and the diluted earnings per share. (Rich, 2012) It is through the requirement of 1AS 33 that any public company trading its securities publicly, to present in its financial statements the basic and the diluted earnings per share. The ratio is calculated by
Earnings per share = net income after tax – preference dividend *100%
Number of outstanding ordinary shares
In the year 2013,
Earnings per share =
Basic = 27.16%
Diluted = 276.22%
Underlying earnings per share =
Basic =33.71%
Diluted = 32.48%
The basic earnings per share in the Aberdeen Plc are 27.16% that has been calculated about the weighted average number of outstanding ordinary shares. However, the diluted earnings per share are determined by considering ordinary shares that are potentially dilutive such as any convertible negotiable instruments and whether they meet the required criteria. The impact of the results above is that the company has still lower performance when compared to other businesses basing on the same financial reporting period and differently financial periods for Aberdeen Company. Investors will not invest in the organization nor lend any money to it as they find no value or quality of the investment. (Coller, 2003)
In the year 2012,
The earnings per share recorded were
Basic = 18.88%
Diluted = 17.55%
Underlying earnings per share
Basic = 24.45%
Diluted = 22.62%
The Earnings per share recorded a loss from the financial statements of Aberdeen asset Management Company. The loss depicts poor financial performance of the company. The impact of this is that the investors will not invest in the company as they will not find any value and quality of the investment. (Coller, 2003)
In the year 2011, the earning per share recorded were
Basic = 15.01%
Diluted = 14.06%
Underlying earnings per share
Basic = 20.13%
Diluted = 18.73%
A similar case was detected in 2011 as the company recorded a lower financial performance with the loss made from the earning per share. The impact of this is that investors will not invest in Aberdeen Company as they will have little assurance of the value of the money they wish to trade in, and the investment is not viable. (Arnold, 2005)
Another essential ratio is the dividend payout ratio. The ratio will show the company’s dividend policy .it is calculated
Dividend payout ratio = dividend per share * 100%
Earnings per share
The dividends per share for the years 2013 is 16%, 2012 is 11.5% and for 2011 is 9%.
The earnings per share are 2013 is 27.16%, 2012 is 18.88% and 2011 is 15.01%.
Calculating dividend payout
In the year 2013, the dividend payout = 16/27.16*100%
Answer = 58.91%
In 2012, the dividend payout = 11.5/18.88*100%
Answer = 60.91%
In 2011, the dividend payout ratio = 9/15.01*100%
Answer = 59.96%
The implication of the dividend payout ratio in 2013 is that the company’s policy is not consistent as it has a reduction from the year 2012 to 2013. Investors will want to see a consistent dividend payout ratio in order to invest in Aberdeen asset Management Company. The payout ratios are relatively safe for investors to invest, but a higher dividend payout will lure more investors to invest. (Simons, 2000)
One will also use the dividend cover ratio to determine the viability of the investment by investors. The dividend cover ratio will be used to determine the number of times the basic dividend will be paid out from the profits of the company. (Simons, 2000)
Calculating dividend cover ratio
It is calculated as, Dividends cover ratio = Earnings per share
Dividends per share
In 2013, the dividends cover ratio is = 27.16/16
Answer = 1.69 times
In 2012, the dividend cover ratio = 18.88/11.5
Answer = 1.64times
In 2011 the dividend cover ratio = 15.01/9
Answer = 1.67times
The results show that there is no consistency in the dividends cover as there is a decrease in 2012 of 0.03. Investors will be interested in the consistency of the payment of member’s dividends from the company’s profits. The payment times for the dividends out of the profits is very low, and the implication is that the investors will not invest in the company as they are not persuaded of the company’s ability to pay all debts with the current profit. (Pike & Neale, 2003)
The investors will also need to know the dividend return that they will get from investing in the ordinary shares of the company. The calculation of the dividend yield will thus be necessary to determine the possibility of investors investing in Aberdeen. (Pike & Neale, (2003)
Calculation of Dividend yield ratio
The dividend yield ratio is calculated as
Dividend yield ratio = dividend per share *100%
Market price per share
In 2013, the dividend yield will be 16/10*100%
Answer = 160%
In 2012, the dividend yield ratio = 11.5/10*100%
Answer = 115%
In 2011, the dividend yield ratio = 9/10*100%
Answer = 90%
The dividend yield ratios show a real return provided by the ordinary shares invested. The dividend return increases consistently from 2011 to 2013 by a great margin. The margin is of 25% between the year 2011 and 2012 and a margin of 45% in the year 2013 and 2012. The return is good to persuade more investors to invest their ordinary shares in Aberdeen asset Management Company. (Arnold, 2005)
Another investment ratio to calculate the dividend is the use of price earnings ratio. The price earnings ratio will be used to determine the economic cost of trading the ordinary shares. It determines how cheap or costly it will be for an investor to trade in a share. (Arnold, 2005)
Calculation of dividends price earnings ratio
Price earnings ratio = market value per share
Earnings per share
In 2013, the price-earnings ratio = 10/27.16
Answer = 0.37: 1
In 2012, the price-earnings ratio = 10/18.88
Answer = 0.52:1
In 2011, the price earnings ratio = 10/ 15.01
Answer = 0.67
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