Reference no: EM132593349

A company is an online retailer of books, CDs and DVDs. The company was set up five years ago by a wealthy entrepreneur, David Nile, and has now grown to the point where the board of directors have decided that a listing should be sought on the local stock exchange. David Nile owns 80% of the ordinary shares and has agreed to sell all of these as part of the public offering.

• Recently, the board of directors began to debate the future dividend policy of the company, assuming the stock exchange listing would be successful. However, there was a clear divergence of views. The chairman felt that the current dividend policy was unacceptable and needed to be changed. He argued that the company had been investing heavily in its distribution methods and in advertising in the early years, and that the dividend policy had not been a pressing issue. However, the proposed listing must now lead to a reconsideration of the importance of dividends. The chief operating officer, on the other hand, felt that the chairman's concerns were unfounded, as the pattern of dividends had no effect on the shareholder wealth.

Information concerning the company since it was first set up can be found in the table on the following page:

Year ended 30 November Net profits after taxation Ordinary dividends Ordinary shares in issue

              R             R                  R

2014         650       320           800

2015        520           150         1000

2016        760           480            1000

2017       1240             600             1500

2018            1450          540              1500

Question 1: Evaluate the views expressed by the chief operating officer and by the chairman regarding dividends

Question 2: Analyse the dividend policy that has been pursued to date and discuss whether a change would be in the interests of shareholders.

Question 3: What are the key points that should be considered when establishing an appropriate dividend policy for the company?