Going public and the dividend policy of the company

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Plekhanov Russian Economic Academy

The theme of the report:

“Going public and the dividend policy of the company.”

By Timofeeva M. V.

The supervisor: Sidorova E. E.

Moscow 2001.

Contents

Introduction

I. ‘Going Public’ and the Securities Market3

‘Going Public’

Types of Shares

The Stock Exchange and the Capital Market

Procedure for an Issue of Securities

Equity Share Futures and Options

II. Dividend Policy and Share Valuation

Dividends as a Residual Profit Decision

Costs Associated with Dividend Policy

Other Arguments Supporting the Relevance of Dividend Policy

Practical Factors Affecting Dividend Policy

Alternatives to Cash Dividends

Summary

References

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Introduction

In this report we focus on the long-term financing by issuing shares and dividend policy of the company. We consider the institutional design of capital market, Stock Market Exchange and Alternative Investment Market; fundamental theories of paying dividend and factors which influence Dividend Policy of the companies.

The main objective of this report is to develop a better understanding of the problems faced by start-up firms seeking capital financing and paying percentage (dividends). In addition, we try to identify the consequences of shortcoming and overplus of the dividend payouts for value of corporation (for value of share) and individuals (shareholders).

The urgency of this question is obvious, because firms need capital to finance product-development or growth and must, by a lot of factors (interest rate, time period and etc), obtain this capital largely in the form of equity rather than debt. So the issuing of shares and dividend policy is one of the widest research overseas and I hope Russian economists don’t be backward in that list.

I. ‘Going Public’ and the Securities Market

‘Going Public’

Most private companies that experience the rapid growth have reached the stage when existing shareholders’ private resources are exhausted, retained profit is insufficient to cope with the rate of expansion, and further borrowing on top of your current amount of loans will probably be resisted by lenders until you have a more substantial layer of equity capital. One solution to this financial problem is to retain the services of a financial intermediary – usually a merchant bank – to find a few private individuals or financial institution such as an insurance company or an investment trust that is willing to subscribe more capital. This is known a private placing. And, of course, there are some advantages and disadvantages of going public.

Advantages

access to the capital market and to larger amounts of finance becomes possible by having shares quoted on the Stock Exchange;

institutions are more likely to invest on the public listed company, and additional borrowing becomes possible;

shareholders will find it easier to sell their shares in the wider market;

the company attains a higher financial standing;

provides an opportunity for public companies to introduce tax-efficient employee share option scheme.

Disadvantages

cost of a public flotation of shares are high – as much as 4% - 10% of the value of the issue;

because outside shareholders are admitted, some control may be lost over the business;

publicly quoted companies are subject to more scrutiny than private;

the risk of being taken over by purchasing of company’s shares on the Stock Exchange;

as the market tends to be influenced more by the short- then long-term strategy of listed companies, a company committed to a long-term plan may find its stock market performance disappointing.

The going public company is required:

minimum issued capital of ₤50.000;

minimum market capitalization of ₤500.000;

25% of your equity shares available to the public;

sign a Stock Exchange listing agreement, which binds you to disclose specified information about your company in future.