Chapter 12 • The dividend decision
directors intend that, if the project is undertaken, the cash payoff will all be paid to
shareholders by increasing the dividend expected in three years’ time.
If the project is undertaken, the amount of the payoff, and the directors’ intention
to use it all to augment the normal dividend due in three years’ time, will be publicly
announced.
(a) What amount will the dividend per share, in three years’ time, need to be such that
shareholders will be indifferent between receiving this year’s dividend and the cash
being used for the project? Assume that the Gordon dividend growth model and
the assertion of Modigliani and Miller on dividends are both valid. (Ignore taxation
in this calculation.)
(b) Explain the Gordon dividend growth model and the assertion of Modigliani and
Miller on dividends.
(c) Explain why, in practice, the shareholders may not be indifferent to the company
missing this year’s dividend and undertaking the project, even if the increased divi-
dend expected in three years’ time equals the amount calculated in (a).There are sets of multiple-choice questionsand missing-word questions
available on the website. These specifically cover the material contained in this
chapter. These can be attempted and graded (with feedback) online.
There is also an additional problem, with solution, that relates to the material
covered in this chapter.
Go to http://www.pearsoned.co.uk/atrillmclaneyand follow the links.‘