IW Technologies (IWT) is a 6-year old company founded by Harold Jacksen and Donald Smith to exploit meta-material plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. The technology, although highly-advanced, is relatively inexpensive to implement and their patented manufacturing techniques require little capital in comparison to many electronics fabrication ventures. Because of the low capital requirement, JS have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth and JS have decided to take the company public. Until now, JS have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy.
Your new boss at the consulting firm FLT and Associates, which has been retained to help IWT prepare for its public offering, has asked you to make a presentation to Jackson and Smithfield in which you review the theory of dividend policy and discuss the following issues.
PART ONE
What is meant by the term “distribution policy”? How have dividend payouts versus stock repurchases changed over time?
The terms “irrelevance,” “dividend preference, or bird-in-the-hand,” and “tax effect” have been used to describe three major theories regarding the way dividend payouts affect a firm’s value. Explain what these terms mean, and briefly describe each theory.
750-1000 words
PART TWO
What do the three theories indicate regarding the actions management should take with respect to dividend payouts?
What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts?