Case 9 - Much Ado About Nothing

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I. Point of View
The viewpoint that the group will use in the analysis of the case will be that of a
third party point of view.
II. Statement of the Problem
What will be the most beneficial to the New Wave Corporation and its owners in
terms of dividend payments.
III. Objective
The objectives for this case are as follows:
● To evaluate whether or not dividends will be paid;
● To identify what dividend payment approach is best suited for the company and;
● To determine how much dividends will be paid and when should it be paid
IV. Areas of Consideration

The areas of considerations for this case are as follows:
● The overall Company income
● Dividends and future growth in order to maximize the firm’s stock price and
shareholder value
● Profitable reinvestment of surplus cash flow
● Preferences of potential investors
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V. Alternative Courses of Action

Below is the group’s Alternative Courses of Action
1. To not issue a dividend (as suggested by Mr. Joe Smolinski)
2. To issue dividends using the following dividend theories as suggested by the
officer of New Wave Corporation:
Bird in the Hand Theory (as suggested by Mr. Jim Baker)
The bird in hand is a theory that says investors prefer dividends
from stock investing to potential capital gains because of the inherent
uncertainty associated with capital gains. Based on the adage, "a bird in
the hand is worth two in the bush," the bird-in-hand theory states that
investors prefer the certainty of dividend payments to the possibility of
substantially higher future capital gains.
The bird in hand theory says investors prefer stock dividends to
potential capital gains due to the uncertainty of capital gains.
Dividend Irrelevance Theory (as suggested by Ms. Janet Long)

The dividend irrelevance theory is the theory that investors do not
need to concern themselves with a company's dividend policy since they
have the option to sell a portion of their portfolio of equities if they want
cash.
Investor’s Homemade Dividends

Homemade dividends are a form of investment income generated
from the sale of a portion of an individual's investment portfolio. These
assets differ from the traditional dividends that a company’s board of
directors distributes to certain classes of shareholders.
The ability of investors to mine homemade dividends has triggered
debate as to whether traditional dividends offer substantial value.
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Residual Dividend Approach (as suggested by Mr. Bob Mackay)

A residual dividend is a dividend policy that companies use when
calculating the dividends to be paid to shareholders. Companies that use a
residual dividend policy fund capital expenditures with available earnings
before paying dividends to shareholders. This means the dollar amount of
dividends paid to investors each year will vary.
Management adopts a residual dividend policy to invest in the
company’s development, such as upgrading manufacturing capacity or
adopting new methods to reduce waste, theoretically resulting in greater
long term growth.
VI. Conclusions and Recommendations
For New Wave Corporation, the residual dividend policy is the best option for
them since its primary goal is for the creation of value and the maximization of
wealth of the shareholders by only distributing dividends/the amount left over after all
the acceptable investment opportunities have been assumed.
This option will bear the most benefits for both the company and the shareholders
since the company will be able to push through its $1,000,000 expansion, and at the
same time distribute a good enough amount of dividend to its shareholders.
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VII. Action Plan

1. No Issuance of Dividends
The non-issuance of dividends would leave a negative impression to the investors of
company performance since dividends paid by the firms are viewed positively both by
the investors and the firms. Investors would rate the firms oppositely should they know
that they do not pay out dividends thus affecting the price of the stock of the company.
2. Issuance of Dividends - Residual Dividend Policy
Based on the Residual Dividend Policy, as shown on the computation below, New Wave
Corporation will be issuing $360,000.00 as dividends to 1,000,000 shares ($0.36 of
dividends/share).
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Since we are using the residual dividend policy, companies usually rely on internally
generated equity to finance any new projects which results to dividend payments coming
out of the residual or what is left over after all project capital requirements are met.

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1

third party point of view.

II. Statement of the Problem

terms of dividend payments.

IV. Areas of Consideration

V. Alternative Courses of Action

Dividend Irrelevance Theory (as suggested by Ms. Janet Long)

Investor’s Homemade Dividends

Residual Dividend Approach (as suggested by Mr. Bob Mackay)

VI. Conclusions and Recommendations

VII. Action Plan

The non-issuance of dividends would leave a negative impression to the investors of

2. Issuance of Dividends - Residual Dividend Policy

Corporation will be issuing $360,000.00 as dividends to 1,000,000 shares ($0.36 of

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