Dividend policy refers to decisions concerning paying out earnings to shareholders and retaining earnings for reinvestment. In theory, optimal dividend policy is one that strikes a balance between current dividend and futures growth to minimize WACC while maximizing stock value. To craft an appropriate dividend policy for GGML, the directors would have to consider several factors, including the following:

• Legal requirements – There are certain provisions in the Companies Code that restrict dividend payment with a view to protecting the interest of lenders. For instant, a company cannot pay out more dividends than distributable earnings in its reserves.
• Investment opportunities/requirements – When a firm is presented with a lot of investment opportunities that are in line with its growth strategy, it would require more financing. As earnings retention is the first choice on the pecking order, higher investment requirements would restrict dividend payment. As a fast growing company, GGML’s investment requirements would be high; and so may have to maintain a dividend policy that retains more earnings to fund investments. If GGML revises its growth strategy and rather pursues a lower growth rate, it can maintain a dividend policy that pays out relatively more dividends.
• Alternative sources of finance – The amount of dividends the company can afford to payout is influenced by the variety of financing sources available to the company. If the company has access to a variety of financing sources (including debt financing), then it can afford to maintain a dividend policy that pays out more dividends. However, considering the fact that GGML is rather repaying debt and not getting more, it cannot afford to maintain a dividend policy that pays out more cash to
  shareholders.
• Tax implications for shareholders – Earnings payout or retention has tax implications for shareholders. For instance if tax on dividend is lower than tax on capital gains, majority of shareholders may prefer current dividends to future capital gains.
  

Dividend capacity which is the amount of dividend a firm can afford to pay to its shareholders is measured by free cash flow to equity (FCFE). GGML’s free cash to equity for the recent year and the coming three years are computed below:

MAXIMUM DIVIDEND FOR RECENT YEAR:

For the past financial year, GGML can afford to pay maximum dividends of GHS30.1m, which is 10.2% of earnings. This implies that company cannot meet its IPO promise of 20% payout ratio.

Recommendation for next 3 years:
The FCFE projections for the coming three years suggests that the company can pay a maximum dividend of GHS55.42m in 2016, GHS86.76m in 2017, and GHS125.72m in 2018.
The ratio of dividend capacity to net income (i.e. maximum payout ratio) ranges from 15.3% to 23.5% over the coming three years. However, to maintain a smooth dividend payout policy, the directors may consider the minimum payout ratio in the range (which is about 15%) or the average (which is about 20%).

• Market sentiment. Where a business is a conglomerate, investors may lack confidence in the ability of the directors to manage efficiently a diverse range of operations and this may be reflected in the share price. By ‘spinning-off’ certain business operations, the managers of these operations will usually have greater autonomy and this can lead to improved performance. Any improvement in performance should, in turn, lead to enhanced shareholder value.
• Market valuations. The directors of a company may feel that a particular business operation is undervalued by the market. A ‘spin-off’ of this operation may help the market to value it separately, which may again lead to enhanced shareholder value.
• Investor preferences. Where a company is a conglomerate, investors may not be equally attracted to each of the different business operations that are being undertaken. By ‘spinning-off’ different business operations and creating separate companies for each, investors can adjust their share portfolios to reflect the investment that they wish to make in each type of operation.
• Strategic objectives. The directors of a company may feel that certain operations are not compatible with the strategic direction that has been set. As a result, ‘non-core’ operations may be ‘spun-off’.
• Takeover defence. A company may attract the unwelcome attention of a predator which is interested in a particular part of the company’s operations. By ‘spinning-off’ this part of its operations, the company may avoid the threat of a takeover, although the operations that have been ‘spun-off’ may still be under threat of a takeover.                   (Any 3 points)
  

Where a company ‘spins-off’ part of its operations there will be a reduction in its overall size, which may bring with it a number of disadvantages including:

• An increased vulnerability to takeover.
• A reduced ability to raise loan finance.
• A reduced ability to benefit from economies of scale through bulk buying, common administrative functions etc.
• A reduction in market status
  

Value of one share in Last Chance Ltd before the ‘spin-off’  = (GH¢300m/400m) x 11·4
.                                                                                                       = GH¢8·55
Value of shareholding (10,000) before spin-off = 10,000 x GH¢8·55
.                                                                                  = GH¢85,500
The earnings available to shareholders after the spin-off is = (GH¢300- GH¢40)
.                                                                                                     = GH¢260m
Value of one share in Last Chance Ltd after the ‘spin-off’  = (GH¢260m/400m) x 11·0
.                                                                                                    = GH¢7·15
Value of shareholding (10,000) after spin-off = 10,000 x GH¢7·15
.                                                                              = GH¢71,500

(A)
Value of shareholding in Ananse Systems assuming a P/E ratio of 17 times
Value of one share in Ananse Systems = (GH¢40m/64) x 17
.                                                                   = GH¢10·625
Value of shareholding in Ananse Systems = (1/8 x 10,000) x GH¢10.625
.                                                                         = GH¢13,281
Thus, the total wealth of the shareholder will be GH¢84,781 (i.e. GH¢71,500 + GH¢13,281) compared to GH¢85,500 before the ‘spin-off’.

(B)
Value of shareholding in Ananse Systems assuming a P/E ratio of 18 times
Value of one share in Ananse Systems = (GH¢40m/64) x 18
.                                                                   = GH¢11·25
Value of shareholding in Ananse Systems = (1/8 x 10,000) x GH¢11·25
.                                                                         = GH¢14,062
Under this scenario, the total wealth of the shareholder will be GH¢85,562 (i.e. GH¢71,500 + GH¢14,062) compared to GH¢85,500 before the ‘spin-off’.

The above calculations reveal that the benefits to the shareholder of the ‘spin-off’ are, at best, marginal and that there is a risk that shareholder wealth will be reduced. The case for a ‘spin-off’ is, therefore, not clear.

The investment decision considers the benefits of investing cash either in projects or in working capital or even in high yield deposit accounts. This is important to shareholders as it will determine the cash flows which are generated by the company and will ultimately affect the dividends paid and the share price. Assessing projects can sometimes be difficult as the returns may be spread over many years making the cash flows harder to estimate. Shareholders will also be concerned to compare the risk as well as the return between profits, as a higher risk investment should carry a higher return to compensate.

The financing decision considers the source of the finance required for the business operations. This will be a mixture of equity and long-term debt finance; companies need to balance the benefits to their shareholders – debt is a cheaper form of finance as the returns required are lower (due to lower risk) and the debt interest is tax allowable, but excessive gearing can increase the risk to the company, and hence the shareholders, dramatically.

The dividend decision looks at how much of the surplus cash generated should be paid out to the shareholders, and how much retained for future investments. Companies often make two payments a year, and shareholders generally prefer a predictable, steadily rising, dividend rather than one which follows the fluctuations of the profits. A dividend policy is often declared for a number of years to give this predictability. A company which then delivers what it promises will generally be regarded as less risky, and hence more valuable, by shareholders.

The three decisions are, therefore, interrelated as the finance needed for viable projects will come from both internal funds, which have not been paid out as dividends, and externally raised finance. The mixture of funds raised and used will then affect the cost of capital, which in turn will affect the viability of investments.

Calculation of Amount Available if the Company is liquidated and its allocations.

Distributed as follows:

This means that:
(1) If the company had been liquidated, the preference shareholders will lose GH¢3,900 million of the arrears of preference dividends in addition to the total amount of stated capital.
(2) Ordinary shareholder would receive nothing

Analysis:
Allocation of losses 30:67.5
Preference Shareholders 30/97.5 @ 75,600 = 23,262
Ordinary shareholders 67.5/97.5 @ 75,600 = 52,338

If the reconstruction takes place, the total maximum loss would be GH¢75,600 million. Out of this, preference shareholder will suffer a loss of GH¢23,262 million whilst the ordinary shareholder would have to bear GH¢52,338 million.

Analysis of Bank/Cash Balance

Ex-right Price – Right issue Price
¢22.40 – ¢16 = ¢6.40

This is a clear indication that a shareholder should exercise his/her right or sell the shares when right issues are made. Taking no action will lead to loss of value of wealth.

Money Laundering constitutes an illegal act of concealing the identities of parties to financial transactions. It is a term used to describe the process by which criminals disguise the original ownership and control of the process of criminal conduct by making proceeds appear to have been derived from a legitimate source.

Risk-Based approach to anti money laundering – The risk-based approach is a means of allocating supervisory resources with the effect to targeting areas of higher risk of money laundering.

Steps of risk-based approach are as follows:
1. Identify the money laundering risk that are relevant to the business
2. Conduct detailed risk assessment on such areas as customer behavior and delivery channels.
3. Design and implement controls to manage and reduce any identified risks
4. Monitor the effectiveness of these controls and make improvements where necessary.
5. Maintain records of action taken and reasons for those action

A company could undertake foreign manufacturing establishment as a strategy to defend existing business due to the following;
1. Demand for local manufacture in foreign country;
2. Reduction in cost of transportation (cost savings);
3. Government policy on tariffs, taxes, import controls and legislations;
4. Challenges with agents and licenses;
5. The need to protect patents and intellectual property;
6. Protection of parent company shareholders against recession;
7. The search for profitable uses for under-employed resources;
8. The need to internationalize to match competitors, suppliers and customers
9. Fear of losing local market
10. Development of global plan and strategies.                          (Any 5 points)

1. Hedging – this is a strategy to mitigate exposure to risk by undertaking equal and opposite transactions. An example is currency risk and interest rate risk. It involves implementation of action to ensure certainty of business outcome.
2. Diversification – This involves strategies to avoid risk by spreading funds over a portfolio of investments. A portfolio of different investments with varying degrees of risk helps to reduce the overall risk of the business. This helps to prevent the concept of “putting all eggs in one basket”.
3. Risk Mitigation – This involves implementation of control to avoid investments in projects whose risk is higher than the shareholders required rate of return.

To:              All Directors of Foreign Subsidiaries
From:         Group Finance Director
Subject:      Benefits of Treasury Centralisation

It is proposed that the group will shortly centralize its treasury functions. Centralization of group treasury management function means that the decisions regarding currency management, short term investment and borrowing and financial risk management will be taken centrally rather than at subsidiary level.

This will permit significant efficiency, improvements and cost savings. The major benefits will be as follows;

i) To enhance group decision making – Decisions will be taken in line with the tactical and strategic objectives of the group as a whole, rather than by individual subsidiaries which might from time to time have different objectives.
ii) Foreign exchange risk management – a central treasury can better appreciate the total foreign exchange exposure position of the group. Netting and matching of receivables and payables in different currencies will be possible allowing transactions cost savings as only the net amounts needed, be hedged or transmitted.
iii) Better knowledge will exist of total debt and cleared bank balances. This will facilitate interest rate hedging. Surplus cash from one subsidiary will be lent to other subsidiaries of relatively favorable rates.
iv) High Investment Returns – Cash may be aggregated and invested at better rates and borrowing may be possible at favourable rate, including from international markets to which individual subsidiaries would not have direct access.
v) Transfer prices will be centrally set to try to minimize the group tax bill.
vi) A centralized treasury functions with effective internal controls, will be able to prevent the possibility of major financial losses.
vii) A centralized treasury will be able to collect and analyze relevant economic and financial information and supply such information to the benefit of all subsidiaries.

Market Value of Plainview Farm Limited:
Using the Gordon’s growth model: g = rb
Where, r = return on investment
.           b = retention ratio
.           g = rb,      r = 0.16,      b = 0.25
.           g = 0.16 x 0.25 = 4%

Future Dividend in 1 year
= D1 (1 + g)
= 600 (1.04) = GH¢624million
Market Value (MV) = d/(r-g)

.                                = GH¢624m/(0.12-0.04)

.                                = GH¢7.8 billion

Market Value of Cottage Industries Limited:
r = 0.21,     b = 2/3
g = rb = 0.21 x 2/3

= 14%

Future Dividend in 1 year
100 (1.14) = GH¢114 million
Market Value (MV) = d/(r-g)

.                                = GH¢114m/(0.18-0.14)

.                               = GH¢2,850 billion

Plainview Farm Limited earning in 1 year                           GH¢m
.                    GH¢800 million x 1.04                                      832
Cottage Industries Limited
.                    GH¢300 million x 1.14                                      342
.                                                                                              1,174

Dividend in 1 year  GH¢1,174 million @ 40% =  GH¢469.60m
If r = 0.2 and b = 0.6
g = 0.2 x 0.6 = 0.12

Post-Acquisition Market Value:
MV   = GH¢469.6m/(0.16 – 0.12)  = GH¢11740 billion

Maximum Price   = GH¢11,740billion – GH¢2,850 billion

.                            = GH¢8,890 billion
Payable for Cottage Industries Limited is GH¢8,890 billion

• White Knight: A situation in which the target company looks for a friendly company where offer is more appealing for the takeover bid.
• Shark Repellant: This involves amending the company’s memorandum and articles of association in such a way that makes the takeover difficult for the acquiring company. An example is increasing the margin of majority votes required at an Annual General meeting called to approve such a takeover.
• Pac-man Defence: An anti-takeover strategy in which the target company tries to buy up the share of the acquiring company.
• Golden Parachutes: This refers to provision in the executives’ employment contract that call for payment of severance pay or other compensation should they lose their job as a result of a successful takeover.
• Poison-Pill: A strategy sometimes employed by target companies in a takeover bid to reduce the attractiveness of their securities/assets to the prospective acquiring firm. This is often done by enlarging the outstanding shares of a target company through a new issue of shares to its shareholders at a discount to the market price, thus making the takeover quite expensive to the prospective acquiring firm