HW-2244 Week 3 Discussion Board Assignment

Infomatic Specialists Inc. (ISI), which developssoftware for the health care industry, was founded five years ago by Juan Benitez and Peggy Stark, who are still itsonly stockholders. ISI has now reached the stage where outside equity capital is necessary if the firmis to achieve its growth targets yet still maintain its target capital structure of 60%equity and 40% debt.Therefore, Benitez and Stark have decided to take the company public. Until now, Benitez and Stark have paidthemselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, sodividend policy has not been an issue. However, before talking with potential outside investors, they must decide ona dividend policy.Assume that you were recently hired by Arturo Anderson& Company (AA), a national accounting firm, which has been asked to help ISI prepare for itspublic offering. Mattie Millard, the senior AA consultant in your group, has asked you to make a presentation toBenitez and Stark in which you review the theory of dividend policy and discuss the following questions:a. (1)  What ismeant by the term dividend policy? (2)  The termsirrelevance and relevance have been used to describe theories regarding the waydividend policy affects a firm’s value. Explain whatthese terms mean, and briefly discuss the relevance of dividend policy. (3)  Explain therelationships between dividend policy and (i) stock price and (ii) the cost ofequity under each dividend policy theory. b.  Discuss (1)the information content, or signaling, hypothesis; (2) the clientele effect;(3) the free cash flow hypothesis; and (4) their effects on dividendpolicy. c.  (1)  Assume that ISI has an $800,000 capitalbudget planned for the coming year. You have determined that its present capital structure (60percent equity and 40% debt) is optimal, and its net income is forecasted at $600,000. Use the residualdividend policy approach to determine ISI’s total dollar dividend and payout ratio. In theprocess, explain what the residual dividend policy is, and use a graph to illustrate your answer. Thenexplain what would happen if net income were forecasted at $400,000, or at $800,000. (2)  In generalterms, how would a change in investment opportunities affect the payout ratiounder the residual payment policy? © 2017 Cengage Learning. All Rights Reserved. May notbe scanned, copied or duplicated, or posted to a publicly accessible website,in whole or in part. (3)  What arethe advantages and disadvantages of the residual policy? (Hint: Don’t neglectsignaling and clientele effects.) d.  What aresome other commonly used dividend payment policies? What are their advantagesand disadvantages? Which policy is most widely used inpractice? e.  What aredividend reinvestment plans (DRIPs), and how do these plans work? f.  What arestock dividends and stock splits? What are the advantages and disadvantages ofstock dividends and splits? When should a stock dividend asopposed to a stock split be used? g. What are stock repurchases, and why are they used?What are the advantages and disadvantages of stock repurchases?