Dividends of Amulmina Company - Case Study Example

Name: Tutor: Course: Date Dividends of Amulmina Company Dividend policy Dividend policies are set guidelines a firm uses to help them decide the amount of earnings to be paid out to shareholders. Dividends are also investment plans by stakeholders that ensure the business is making profits hence the need to come up with dividend policies to invest the businesses earnings. Most of the shareholders prefer to come up with policies that will not affect their income since dividend policies are long term investments which a firm develops and shareholders are not willing to wait for more than five years for a policy to register profits. The three main dividend policies a firm can adopt are: Residual Dividend policy Firms using this policy choose to rely with inside generated equity to finance their projects thus dividend payments are from the residual equity which are available only when all requirements to a project are met. Hence, firms of this nature strive to retain steadiness in their debt or equity ratio before any dividend sharing so as to ensure that dividends are shared after all working and development expenses are met. This technique of dividend payment ensures voluntary dividend payments which investors find objectionable. Residual dividend model is normally founded on the main pieces which are utilizing an investment opportunity schedule (IOS) which does not benefit any of the stakeholders but benefits the entire firm. Target capital structure is also a key piece since it leads to increase in a capitals firm and a cost of external capital is also raised to help meet the required capital. Residual dividend models the most advantageous in locating longer-term dividend since of the implication of capital projects budgeting. However, the disadvantage of using residual dividend is that dividends may be unstable since the incomes per year will be dependent on the business situation hence difficulties to uphold steady earnings and steady dividends. Most of companies do not practice residual dividend model for long term planning since it is not possible to calculate the dividends quarterly. Residual policy is mostly used by businesses that are owned by less than two people since this policy may take five years or more before it matures. Hence, shareholders in a large organization will not prefer to invest in long term policy thus this policy is not applicable to large organizations. Dividend stability policy Dividend stability policy reduces uncertainty for investors since it is able to provide income without necessary relaying on the business situation. This is because, the fluctuation of dividend created differences with certainty of the dividend stability policy hence it relays on the payout policy followed by the firm. Firms which use this policy are always on the aim to share income with the firm’s stakeholders rather than searching for new projects for the firm since their not willing to risk their earnings for an investment. Hybrid dividend policy This approach is said to be a blend of the residual and stable dividend policy since firms using hybrid dividend policy seem to sight debt or equity ratio to be a long term goal rather than a short term goal. Hence the common use of hybrid approach by most firms since it ensures fair treatment to both the shareholders and employees of the firm. Hybrid dividend policy has one established dividend which is said to be a small slice of the firms income hence can be sustained thus the companies will only offer extra dividend when earnings surpasses general levels. Alumina limited uses hybrid dividend policy since the company uses the same dividend amount for several years which is changed depending to the performance of the company. If they record and exceed in general levels of income they increase the dividend rate however a decrease in income will cause a decrease in dividend amount. Alumina’s dividends are controlled by the policies of AWAC which holds a meeting annually to decide how they will distribute cash after they have already serviced their debts and met all their corporate cost commitments the board then considers the capital structure of the company, that of AWAC and the market conditions hence dividends are then fully franked for the future. Alumina uses hybrid dividend policy since it suitable for companies with several number of shareholders hence its use in this company since hybrid dividend promotes fair sharing of earnings and utilization of dividends only when surplus thus avoiding the company from making losses. Alumina company balance sheet value brought down from 31st December, 2013 where as shown below losses in dividends reflect on a balance sheet hence the changes in the balance sheet in 31st December, 2014. These will be reflected in the balance sheet as the loss of the year since if dividends lower in a financial year the earnings are minimized to replace the dividend hence the occurrence of the loss. Alumina Company Balance sheet extract As at 1st January 2014 Contributed equity $ reverse $ retained earnings $ total $ b/d 2013 2618.7 628.4 803.1 2,793.4 Loss for the year nil nil 98.3 (98.3) Other comprehensive loss For the year nil 225.2 46.6 (271.8) Dealings without owners in their ability as owners: Movement in treasury shares 0.1 nil nil (0.1) Movement in share founded payment replacement nil 0.6 nil (0.6) Balance at 31 Dec, 2014 2,618 853.0 658.2 2,424.0 Dividends affect the comprehensive income statement since a loss in dividend will cause a loss in the company’s income thus affecting the comprehensive income totals in a financial year. Alumina Company Comprehensive income statement Year ended 31 Dec 2014$ Year ended 31 Dec 2013$ Shares of reverse movement for using the equity method 0.6 3.0 foreign exchange translation difference 224.6 373.1 Re measurements of retirement advantage obligation accounted for spending equity 46.6 67.7 Other comprehensive loss for the year 271.8 302.4 Total comprehensive loss for the year ended attributed to the owners of Alumina limited. 370.1 301.9 Dividends received will affect the cash flows of a company hence the increase in cash flow thus affecting the totals of the cash flow. Statement cash flow for Alumina Company in the year ended 31st December, 2014 Year ended 31 Dec 2014$ Year ended 31 Dec 2013$ Dividends acknowledged 16 100 Distribution acknowledged 4.3 7.3 Finance cost compensated (12.5) (25.5) Payments to suppliers and staffs (15.0) (14.7) GST refund, interest received. (0.4) (0.4) Cash from processes 7.6 67.5 Net payments- investment links (57.4) (9.0) Allowed cash flow 49.8 58.5 Ratio analysis is used to compare the firm’s financial statement accounts hence identifying the strengths and limitations of the company. The comparisons of alumina company dividend ratios are as shown bellow Alumina key financials for 2013 and 2014 2014 2013 Cash acknowledged from AWAC 119.2 110.3 Total dividend declared 1.6 2.0 The ratio in dividend for 2013 and 2014 in Alumina where high in 2013 since the company recorded high ratio hence the company dividend value decreased in 2014 than 2013 thus the company’s low earnings in 2014. Works cited Devi, SL Tulasi, K. Padma, and Sri R. Mohan. "FIXED INVESTMENT ANALYSIS IN ALUMINIUM INDUSTRY." Tripathi, Vanita, and Khushboo Aggarwal. "Dividend Opportunity Index: An Opportunity for Small Investors." Indian Capital Market–An Empirical Study by Gupta et al (ed) (2013): 76-86. Tebogo, Baitshepi. "The Transfer Pricing Problem: When Multinational Corporations Shift Profits Across International Borders." Available at SSRN 1899014 (2011). Read More