Question

Please give an original answer.

Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield 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 Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield 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 Flick 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.

1. What is meant by the term “distribution policy”? How has the mix of dividend payouts and stock repurchases changed over time?Minimum 150 words or more. Thank you.

Answer 1

Distribution policy is a firm’s policy where the directors have to decide about a) amount of level of earnings to be distributed, b) the form of distribution ie. whether through cash dividend distribution ie. "bird in the hand" or Stock repurchases ie. "future dividend growth", c) whether stability in the distribution type exists.

In Distribution policy the income earned by firm is distributed to its owner ie. the shareholders in the form or cash dividend or stock repurchases. The dividend distribution amount will depend on firm’s future investment opportunities. In last few years, the pattern of distribution has been changing from cash dividend to Stock repurchase schemes. The stock repurchase will enhance the existing shareholder’s dividend per share in future. The repurchase of stock would reduce the outstanding Shares of the firm after every repurchase of stock and increase the dividend incidence on each share in future. Therefore, the existing shareholders would able to enjoy firm’s higher return on capital. The distribution mix of the "Dividend" and "Stock repurchases" will provide the benefits of both policy ie. "bird in the hand" and "future dividend growth".