Ican 2025 Strategic Financial Management Question 5

Benco Plc (Benco) has recently become a listed company. Prior to its flotation, this previously family-owned private company made dividend decisions each year to suit the requirements at the time of both the company and the small number of family shareholders who held substantially all of the company’s equity. There was no longterm, stable dividend policy, in place. Following flotation, the family is no longer involved in the day-to-day management of the firm but has retained 45% of the equity, which currently represents the largest single block of shares owned. None of the family members is a Director of the firm any longer, but one member has been retained as a non-executive director. The new Board of Directors consists of a group of young professional managers who are all keen in growing the business rapidly. Now that it is a listed company, the question of establishing a more formal dividend policy has arisen and a forthcoming board meeting will address the issue. As the company’s Finance Director you have been approached by two Directors who have made the following observations. Director A The value of the company’s shares is tied to the level of the company’s dividend, so we should pay the maximum dividend possible. If at any time this policy places pressure on finances, then raising further equity will be that much easier, given the policy of maximum dividends the company will have established. Director B What strikes me is the variety of different views on this issue among our shareholders. Some shareholders tell me they want us to maximise the dividends as they depend so much on the income and are not primarily concerned with capital growth. Others say they would prefer the company to retain much of its profits to invest in new projects so as to maximise the share price.