Answer Happy

Does the dividend policy adopted by a company impact upon the market value of that company? Academic findings within this area have provided conflicting evidence with two distinct theoretical schools of thought; one supporting dividend relevance and the other dividend irrelevance. Critically analyse and evaluate the differing theoretical viewpoints, ensuring the response is developed through incorporating relevant academic research that has been performed within this area.
It is 31 January 2021 and the managers of Clear Plc. are considering a change in the company's dividend policy. Earnings per share for 2020 for the company were 60p, and the finance director has said that he
expects this to increase to 65p per share for 2021. The increase in earnings per share is in line with market expectations of the company's performance. The pattern of recent dividends, which are paid on 31 December is as follows: Year 2020 2019 2018 2017 2016 2015 Dividend per Share (pence) 35.0 32.7 30.6 29.2 27.6 26.2 The managing director has proposed that 65 per cent of earnings in 2021 and subsequent years should be retained for investment in new product development. It is expected that, if this proposal is accepted, the dividend growth rate will be 10.5 per cent. Clear PLC's cost of capital is estimated to be 15 per cent.