Reference no: EM133024162

BUG Clays Limited is a business that aims to maximize the wealth of its shareholders. The Board of directors is currently trying to decide upon the most appropriate dividend policy to adopt for the business's shareholders. However, there is a strong disagreement among three of the directors concerning the benefits of declaring cash dividends.

• Director A argues that cash dividends would be welcomed by shareholders and that as high a dividend pay-out ratio as possible would reflect positively on the market value of the business's shares.
• Director B argues that whether a cash dividend is paid or not is irrelevant in the context of shareholder wealth maximization.
• Director C takes an opposite view to Director A and argues that dividend payments should be avoided as they would lead to a decrease in shareholder wealth.

a) You are required to:

i. Discuss the arguments for and against the position taken by each of the three directors.

ii. Assuming the board of directors decides to pay a dividend to shareholders, what factors should be taken into account when determining the level of dividend payment?

iii. Explain the three possible reasons why shareholders and managers regard dividends payment as being important.