Question

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)
	2018	2017	2016	2015	2014
Sales revenue	\)20,000	\(16,000	\)14,000	\(6,000	\)4,000
Net income	2,400	14,000	800	700	250
Average total assets	22,000	19,000	11,500	4,200	3,000
Current assets	8,000	6,000	3,000	1,200	1,000
Working capital	3,600	3,200	1,200	500	400
Common shares: Number of shares Outstanding (000) Average market price	2,000 \(9	2,000 \)6	2,000 $4	20 -	20 -

Instructions

1. Suggest factors to be considered by the board of directors in establishing a dividend policy.

Short answer

Earnings stability and instability, tax situation, organization planning and ambition, and many other factors must be considered in setting up a dividend policy.

Step-by-step solution

Dividend Policy Analysis

When a company makes a profit, it has two options for using this profit. First, they can keep the profit in the firm, or second, they can distribute it to their shareholders in the form of dividends. The number of dividends and the regularity of payment of dividendsare determined by the dividend policy of the company.

Suggesting factors that should be considered by the board of directors in establishing a dividend policy

The following factors should be considered in setting up a dividend:

1. The organization's growth plans or ambitions, as well as the need for money to fund additional operations.
2. The company's investment options, in comparison to the return available to investors on earnings, are given in the form of a cash dividend.
3. The impact of implementing a dividend on the market value of the company's shares, as well as the impact on financing options.
4. The past and the future earnings stability and instability of the company
5. The option of paying a stock dividend instead of the cash dividend.
6. The general condition of the economy in the area where the company operates, as well as in the United States in general.
7. The company tax position.
8. The individual tax status of investors in which they prefer dividends or capital gains.