Corporate Finance

(a) Market reacts positively to dividend increases and negatively dividend decreases. Three

explanations are provided for this notion.

1. Information content (signalling) hypothesis,
2. Free cash flow hypothesis

iii. Clientele effect

Discuss these hypotheses related to dividend policy.

(30 marks)

(b) Briefly discuss five reasons for companies to choose repurchases rather dividends under a

classical tax system.

(30 marks)

(c) Identify (interim or final) dividend change using “dividend history from the DatAnalysis

Premium Database” for the company allocated to you for the assignment 2.

A dividend change is defined as the relative difference from the previous year’s level.

• Interim dividend change = interim dividend per share in year t minus interim dividend per share in

year t-1.

• Final dividend change = Final dividend per share in year t minus Final dividend per share in year

t-1.

Step 2

Announcement date for the dividend change can be identified from “ASX announcements from the

DatAnalysis Premium Database”.

• Announcement date for interim dividend change: use the announcement date of half yearly

report

• Announcement date for final dividend change: use the announcement date of preliminary final

report

• Select “ASX announcements”
• select “Search option – Click here to refine your search by ASX Announcement Type

and/or text search”

• for Announcement Type: select periodic reports
• for Sub-Announcement Type: select preliminary – final statement for final dividend; half

yearly report interim dividend change

• specify the date rage

Step 3

(i)  Calculate three day return earned by your firm for the period from the day before the

announcement continuing through the day after the announcement date; and two day return earned

by your firm for the period from the day of the announcement to the day after the announcement

date

(ii)  Calculate the market return for the corresponding periods in (i).

(iii) Calculate the excess: (i) – (ii)

Step 4

Check the results for any other two students in your tutorial class and report that result in your

assignment 2

Step 5

Discuss the relevant theory with the findings in Step 3 and Step 4.

(40 marks)

(30 + 30 + 40 = 100 marks)