REGINAN, REYMARK C.

September 24, 2018

MA 4-2
FINANCIAL MANAGEMENT

1. What are the challenges encountered by new organizations in mergers and acquisition? Discuss your
answer.

Answer : Mergers frequently set goals that cannot be achieved but the illusion is comforting. In the corporate
world there is a widespread assumption that at least half of the mergers fail to achieve the goals that brought
them to consider merger in the first place. There is a sense in which merger s are often about transferring the
asset of one organization to another without acknowledging it. Within a few years one of the organizations
has won and the other has lost-power, quality of work life issues, members that’s stay in the merger
organization, etc.. mergers can result in lost members/employees and stagnation. Poorly managed mergers
can result in a merged organization with an organizational culture marked by denial, mistrust, illusion and a
fear/blame cycle.

2. How would a change in investment opportunities affect the payout ratio under the residual payment
policy?

Answer: A change in investment opportunities would lead to an increase (if investment opportunities were
good) or a decrease (if investment opportunities were not good) in the amount of equity needed, hence in the
residual dividend payout.

3. What is a dividend reinvestment plan and how does it work?

Answer: A dividend reinvestment program or dividend reinvestment plan is an equity investment option
offered directly from the underlying company. The investor does not receive quarterly dividends directly as
cash; instead, the investors dividends are directly reinvested in the underlying equity and the investor must
still pay tax annually on his or her dividend income whether it is received or reinvested. This allows the
investment return from dividends to be immediately invested for the purpose of price appreciation and
compounding, without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock.
Because DRIPs, by their nature, encourage long-term investment rather than active trading, they tend to have
a stabilizing influence on stock prices.

4. Describe the series of steps that must firms take in setting dividend policy in practice.

Answer: In finance management , one a company makes a profit, they must decide on what to do with those
profits, they could continue to retain the profits within the company, or they could payout the profits to the
owners of the firm in the form of dividends. Once the company decides on whether to pay dividends, they may
establish a somewhat permanent dividend policy, which may in turn impact on investors and perceptions of
the company in the financial markets. What they decide depends on the situation of the company now and in
the future. It also depends on the preferences of investors and potential investors.
5. What are the stock repurchases and what are the pros and cons of firms repurchasing its own shares?

Answer: A firm may distribute cash to stockholders by repurchasing its own stock rather than paying out cash
dividends. Stock repurchase can be used (1) somewhat routinely as an alternative to regular dividends, (2) to
dispose of excess (nonrecurring) cash that cane from asset sales or from temporarily high earnings, and (3) in
connection with a capital structure change in which debt is sold and the proceeds are used to buy back and
retire shares.

6. What is the impact of dividend policy on the way the management focuses on financial performance.
Explain?

Answer: Firm performance in itself is a broad concept and refer to several different aspects, depending on who
you ask and what it is that is trying to be measured. It can refer to strategic performances such as customer
satisfaction, employee satisfaction and CSR performance, however it can also refer to stricter financial
performances such as profitability, growth or market value. Companies that can display strong financial
performance are by default more inclined to satisfy one of the most important stakeholders , namely investors
and stakeholders argue the financial performance as a method to satisfy investors can be represented by the
above mentioned aspects, profitability, growth and market value.

7. What policies and payments does a firms “ dividend policy “ consist of? Why is determining dividend
policy more difficult today than in decades past?

Answer: A firms dividend policy refers to its choice of whether to pay out cash to stakeholders, in what fashion,
and in what amount. The most obvious and important aspect of this policy is the firms decision whether to pay
a cash dividend, how large the cash dividend should be, and how frequently it should be distributed . in a
broader sense, dividend policy also encompasses decisions such as whether to distribute cash to investors via
share repurchases or especially designated dividends rather than regular dividends , and whether to rely on
stock rather than cash distribution.

8. A firm just announced that it will increase its dividends payment. What do you think is the typical stock
market reaction to such an announcement? Why?

Answer: The firm is demonstrating that it not only has positive cash flows, but these cash flows are increasing
enough to justify a higher payout to shareholders. The firms proves its cash flows by paying out some of the
cash to its shareholders. Higher dividends may signal permanent higher earnings to the firm. An increase in the
dividend payout is considered to be good news.

9. Assume you are the sole owner of a profitable private U.S. corporation: what do you think would be the
most tax efficient method of receiving ownership income (via salary perks, retained earnings, or
dividend)?

Answer: As the sole owner of a corporation the best method of receiving income would be retained earnings.

Reinvesting dividends is the process of automatically using cash dividends to purchase additional stocks of the
same company. If you chose to reinvest your dividend, you still have to pay taxes as though you actually
received the cash .