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Week 1 Discussion — Ethical Dilemma
What They Don’t Know Won’t Hurt Them!
Revolutionary Electronic Technologies (RET) recently released a new advanced electronic micro system to be used by financial institutions, large corporations, and governments to process and store financial data, such as taxes and automatic payroll payments. Even though RET developed the technology used in the creation of the product, RET’s competitors are expected to possess similar technology soon. To beat the competition to the market, RET introduced its new micro system a little earlier than originally planned. In fact, laboratory testing had not been fully completed before the product reached the market. The tests are complete now, and the final results suggest the micro system might be flawed with respect to how some data are retrieved and processed. The tests are not conclusive, though, and even if additional testing proves that a flaw does exist, according to RET, it is of minuscule importance because the problem seems to occur for only one out of 100 million retrieval and processing attempts. The financial ramifications associated with the flaw are unknown at this time.
Assume that you are one of RET’s senior executives whose annual salary is based on the performance of the firm’s common stock. You realize that if RET recalls the affected micro system, the stock price will suffer; thus, your salary for the year will be less than you expected. To complicate matters, you just purchased an expensive house based on your salary expectations for the next few years—expectations that will not be realized unless the new micro system is a success for RET.
As one of the senior executives, you will help determine what course of action RET will follow with respect to the micro system. What should you do? Should you encourage RET to recall the micro system until further testing is completed? What other courses of action do you suggest?
a.
(1) What is meant by the term dividend policy?
(2) The terms irrelevance and relevance have been used to describe theories about how dividend policy affects the value of a company. Explain what these terms mean and briefly discuss the relevance of the dividend policy
(3) Explain the relationships between dividend policy and (i) share price and (ii) cost of equity in each dividend policy theory.
Argue
(1) the content of the information, or the signage, the hypothesis;
(2) the customer effect;
(3) the free cash flow hypothesis; Y (
4) its effects on dividend policy.
b.
(1) Suppose ISI has a capital budget of $ 800,000 planned for next year. You have determined that your current capital structure (60 percent equity and 40 percent debt) is optimal, and your net income is forecast at $ 600,000. Use the residual dividend policy approach to determine the total dollar dividend and the ISI payout ratio. In the process, explain what the residual dividend policy is and use a graph to illustrate your answer. Then explain what would happen if net income were forecast at $ 400,000, or $ 800,000.
(2) Generally speaking, how would a change in investment opportunities affect the payout ratio under the residual pay policy?
(3) What are the advantages and disadvantages of residual policy? (Hint: don’t neglect the signage and the effects of the clientele.)
c.
What are some other commonly used dividend payment policies? What are your advantages and disadvantages? Which policy is most widely used in practice?
d.
What are Dividend Reinvestment Plans (DRIP) and how do these plans work?
and. What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and splits? When should a stock dividend be used instead of a stock split?
F.
What are share buybacks and why are they used? What are the advantages and disadvantages of share buybacks?
Note. Prepare your initial response carefully and be sure to fully answer all questions posed in the discussion case. Don’t just state your opinion – back up and support your position using examples from related newspaper articles, trade or business publications, academic studies, etc. Use Keizer’s online library to help you locate suitable articles from legitimate news sources, periodicals, trade journals, academic studies, etc.
PLEASE USE CITATIONS AND REFERENCES
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