Part 2:Ballwin has now reached the stage in which outside equity capital is necessary if the firm is toachieve its growth targets yet still maintain its target capital structure of 60% equity and 40%debt. Therefore, the management decided to take the company public. However, before talkingwith potential outside investors, Ballwin must decide on a dividend policy.Assume that you were recently hired by Ballwin to help prepare for its public offering. You wereasked to make a presentation in which you review the theory of dividend policy and discuss thefollowing questions:(1)What is meant by the term dividend policy?а.(2)Explain briefly the dividend irrelevance theory that was put forward byModigliani and Miller. What were the key assumptions underlying their theory?(3)Why do some investors prefer high-dividend-paying stocks, while other investorsprefer stocks that pay low or nonexistent dividends?b.Discuss (1) the information content, or signaling, hypothesis; (2) the clientele effect; and(3) their effects on dividend policy.Assume that SSC has an $800,000 capital budget planned for the coming year. Its(1)present capital structure (70% equity and 30% debt) is optimal, and its net income isforecasted at $650,000. Use the residual dividend model approach to determine SSC'stotal dollar dividend and payout ratio. In the process, explain how the residual dividendmodel works. Then explain what would happen if net income was forecasted at$500,000 and at $750,000.С.(2)In general terms, how would a change in investment opportunities affect thepayout ratio under the residual payment policy?(3)What are the advantages and disadvantages of the residual policy? (Hint: Don'tneglect signaling and clientele effects.)d.What is a dividend reinvestment plan (DRIP), and how does it work?Describe the series of steps that most firms take in setting dividend policy in practice.е.f.What are stock repurchases? Discuss the advantages and disadvantages of a firm'srepurchasing its own shares.What are stock dividends and stock splits? What are the advantages and disadvantagesof stock dividends and stock splits?g.Question 1 (for Part 1)Determine using a full analysis of the project if the project should be undertaken. A positiveNPV should be the decision criteria and the NPV should be calculated. An accompanyingformulated Excel sheet should be submitted along a Word document with the explanationQuestion 2 (for Part 2)Answer questions a through g above as thoroughly as possible.

Question
Asked Dec 1, 2019
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Part 2:
Ballwin has now reached the stage in which outside equity capital is necessary if the firm is to
achieve its growth targets yet still maintain its target capital structure of 60% equity and 40%
debt. Therefore, the management decided to take the company public. However, before talking
with potential outside investors, Ballwin must decide on a dividend policy.
Assume that you were recently hired by Ballwin to help prepare for its public offering. You were
asked to make a presentation in which you review the theory of dividend policy and discuss the
following questions:
(1)
What is meant by the term dividend policy?
а.
(2)
Explain briefly the dividend irrelevance theory that was put forward by
Modigliani and Miller. What were the key assumptions underlying their theory?
(3)
Why do some investors prefer high-dividend-paying stocks, while other investors
prefer stocks that pay low or nonexistent dividends?
b.
Discuss (1) the information content, or signaling, hypothesis; (2) the clientele effect; and
(3) their effects on dividend policy.
Assume that SSC has an $800,000 capital budget planned for the coming year. Its
(1)
present capital structure (70% equity and 30% debt) is optimal, and its net income is
forecasted at $650,000. Use the residual dividend model approach to determine SSC's
total dollar dividend and payout ratio. In the process, explain how the residual dividend
model works. Then explain what would happen if net income was forecasted at
$500,000 and at $750,000.
С.
(2)
In general terms, how would a change in investment opportunities affect the
payout ratio under the residual payment policy?
(3)
What are the advantages and disadvantages of the residual policy? (Hint: Don't
neglect signaling and clientele effects.)
d.
What is a dividend reinvestment plan (DRIP), and how does it work?
Describe the series of steps that most firms take in setting dividend policy in practice.
е.
f.
What are stock repurchases? Discuss the advantages and disadvantages of a firm's
repurchasing its own shares.
What are stock dividends and stock splits? What are the advantages and disadvantages
of stock dividends and stock splits?
g.
Question 1 (for Part 1)
Determine using a full analysis of the project if the project should be undertaken. A positive
NPV should be the decision criteria and the NPV should be calculated. An accompanying
formulated Excel sheet should be submitted along a Word document with the explanation
Question 2 (for Part 2)
Answer questions a through g above as thoroughly as possible.
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Part 2: Ballwin has now reached the stage in which outside equity capital is necessary if the firm is to achieve its growth targets yet still maintain its target capital structure of 60% equity and 40% debt. Therefore, the management decided to take the company public. However, before talking with potential outside investors, Ballwin must decide on a dividend policy. Assume that you were recently hired by Ballwin to help prepare for its public offering. You were asked to make a presentation in which you review the theory of dividend policy and discuss the following questions: (1) What is meant by the term dividend policy? а. (2) Explain briefly the dividend irrelevance theory that was put forward by Modigliani and Miller. What were the key assumptions underlying their theory? (3) Why do some investors prefer high-dividend-paying stocks, while other investors prefer stocks that pay low or nonexistent dividends? b. Discuss (1) the information content, or signaling, hypothesis; (2) the clientele effect; and (3) their effects on dividend policy. Assume that SSC has an $800,000 capital budget planned for the coming year. Its (1) present capital structure (70% equity and 30% debt) is optimal, and its net income is forecasted at $650,000. Use the residual dividend model approach to determine SSC's total dollar dividend and payout ratio. In the process, explain how the residual dividend model works. Then explain what would happen if net income was forecasted at $500,000 and at $750,000. С. (2) In general terms, how would a change in investment opportunities affect the payout ratio under the residual payment policy? (3) What are the advantages and disadvantages of the residual policy? (Hint: Don't neglect signaling and clientele effects.) d. What is a dividend reinvestment plan (DRIP), and how does it work? Describe the series of steps that most firms take in setting dividend policy in practice. е. f. What are stock repurchases? Discuss the advantages and disadvantages of a firm's repurchasing its own shares. What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and stock splits? g. Question 1 (for Part 1) Determine using a full analysis of the project if the project should be undertaken. A positive NPV should be the decision criteria and the NPV should be calculated. An accompanying formulated Excel sheet should be submitted along a Word document with the explanation Question 2 (for Part 2) Answer questions a through g above as thoroughly as possible.

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Expert Answer

Step 1

“Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for you. To get remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.”.

Step 2

(a1) Dividend policy refers to a company's policy with respect to paying off the earnings to the shareholders rather than retaining them for reinvestment. The main issues involved in the dividend (distribution) policy are:

Step 3

i)Deciding how much of the amount from the free cash flows can be paid to the shareholders in the form of dividends.
ii)How to provide cash to the share...

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