Financial Management Theory and Practice Mini Case

The purpose of this assignment is to explain core concepts related to cash distributions and capital structure.

Read the Chapter 14 Mini Case in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer question a.

Create a 3-5 slide PowerPoint presentation in which you summarize your answers from the mini case. Be sure to include graphs, charts, and trends as appropriate.

Present the PowerPoint to class, as directed by your instructor.  

In addition, submit both your answers to the mini case and your PowerPoint to the instructor.

While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center.

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.

a. (1) What is meant by the term “distribution policy”? How has the mix of dividend payouts and stock repurchases changed over time?

(2) 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 these terms, and briefly describe each theory.

(3) What do the three theories indicate regarding the actions management should take with respect to dividend payouts?

(4) What results have empirical studies of the dividend theories produced? How does all this affect what we can tell managers about dividend payouts? Discuss the effects on distribution policy consistent with:

(1) the signaling hypothesis (also called the information content hypothesis) and

(2) the clientele effect.