Factors that influence the dividend policy

Assignment Help Financial Accounting

Reference no: EM132298215 , Length: 2000 words

Assignment - This assignment contains two tasks. Read carefully each task and prepare the necessary requirements.

Task 1 -

Dividend policy in a unique environment, Oman where (1) firms distribute almost 100% of their profits in dividends, (2) firms are highly levered mainly through bank loans, and (3) there are no income nor capital gains taxes. There are some common factors that determine dividend policy of both financial and non-financial firms and there are some factors that affect only non-financial firms. The factors that influence the probability to pay dividends are the same factors that drive the amount of dividends paid for both financial and non-financial firms.

Required: Critically evaluate the various factors that influence the dividend policy of both financial and non- financial firms. Support your answer with appropriate arguments?

Task 1 Structure - Total 1000 words.

Introduction

Factors influence dividend policy

Determinants of dividend policy

Determinants of decision & pay dividend

Conclusion

References

Task 2 -

Turki Construction Ltd is considering tendering for a contract which would take three months to complete. It is felt that tenders over OMR 80,000 are extremely unlikely to be successful. The company is in a specialised, highly-competitive market and new contracts are difficult to win and keep. If the contract is taken, Turki Construction Ltd still expects to complete its other current contracts. The management accountant has submitted the cost estimate in below:

	OMR
Direct materials
Type A (already in stock)	8,000
Type B (firm order placed)	6,000
Type C (not yet ordered, shown at current purchase price)	5,000
Direct labour	30,000
Other costs:
Variable overheads	3,000
Depreciation of equipment (straight-line basis)	3,750
Supervisors' salaries (Two supervisors @ OMR 4,000 each per month)	24,000
General fixed overheads	12,000
TOTAL COSTS	91,750

Additional information related to the aforementioned costs is given below:

1. Type A material is already in stock and originally cost OMR 8,000. The material is not in common use and would realise about OMR 6,000 if sold. If Material A is not used on this contract, all of the material could be used later in the year as a substitute for the material that currently costs 30% less than A's original price.

2. Type B material is regularly used by the company. The order for Type B material was placed twelve days ago and cannot be cancelled anymore. Due to a world-wide shortage which is expected to continue for the foreseeable future, Material B's price has increased by 50% since the order was placed. Material B could be sold at this new higher price (after deducting 15% selling costs) to a competitor who urgently needs this material. Alternatively, it can be used on other contracts later in the year.

3. A team of semi-skilled staff would be recruited locally, specifically for the duration of this contract. The wages of these semi-skilled staff will amount to a total of OMR 17,000. Skilled staff would also need to be reallocated to this contract from within the company. These skilled staff already work for the company and are currently being paid although there is very little work for them to do. The estimated wages for these workers for the period of the contract are OMR 10,000. On top of this re-allocation of skilled staff, it is estimated that a further OMR 3,000 overtime need to be incurred by specialist employees who are currently fully employed on the other jobs within the company.

4. The management accountant has calculated variable overheads for the contract using the company's standard policy of 10% of direct labour cost. However, the project manager has estimated that, due to the unique nature of this work, the actual variable overhead arising as a result of the contract is likely to be about OMR 4,750.

5. The equipment to be used on the contract cost OMR 180,000 when it was purchased in May 2011. It was planned to keep it for ten years after which its scrap value was expected to be OMR 30,000. The depreciation charge in the cost estimate is based on this data. At present, the equipment is worth OMR 45,000. If used on the contract, its current value is likely to decline to approximately OMR 40,000. Turki Construction Ltd has no further use for the equipment and if the contract is not accepted they would sell it now.

6. The new contract is so specialised that it has now been realised that one of the two supervisors will have to be recruited from a competitor. She is expected to be paid a premium salary of OMR 5,000 per month. The second supervisor, who is currently paid OMR 4,000 per month, can be temporarily transferred from another department. However, he will only transfer to the project if he is incentivised by means of a one-off bonus payment of OMR 800. His current role will be filled by a temporary upgrading of an existing worker which it is estimated to cost an additional OMR 400 per month.

7. The management accountant has allowed fixed overheads for the contract using the company's pre-determined policy of 40% of direct labour cost. The general fixed overhead absorption rate is calculated based on budgeted rent, rates, insurance, general expenses and similar fixed costs. However, it is anticipated that this additional contract would cause general expenses to increase by OMR 750 per month for the duration of the contract.

Required -

a) Using a relevant/opportunity cost approach, prepare a revised cost estimate for the contract in the light of the above information.

b) For each item of cost referred to in the question, clearly explain your reasoning behind its inclusion in (or omission from) your estimate in a) above.

c) On the basis of your estimate in a) above, state whether the company should tender for this contract.

d) What other considerations should be taken into account in deciding whether to tender for this contract?

Reference no: EM132298215

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