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Dividend decision

Unit: Financial Management

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Practice CPA Financial Management Dividend decision questions with detailed answers and explanations.

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August 2025

 1 Questions
Question 4a
​​Dividends can affect the price of the underlying securities in different ways. While dividend history of given shares plays a general role in its popularity, the declaration and payment of dividends also has a specific and predictable effect on share market prices. 

Required: 
Examine FOUR impacts of dividend payout on share prices.


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April 2025

 2 Questions
Question 2a
​​Distinguish between the following terms as used in finance: 
 
(i) “Finance lease” and “Operating lease”. 
 
(ii) “Capital structure” and “Financial structure”.  
 
(iii) “Scrip issue” and “rights issue”.


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Question 4a
​​In relation to dividend decision of a firm, highlight FIVE advantages of scrip dividend.


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December 2024

 1 Questions
Question 5a
​​A newly listed company at the securities exchange is planning to pay its first dividends. The finance director has been requested by the Board of Directors to formulate the dividend policy of the company. 

Required: 
Summarise FOUR factors to be considered while formulating the dividend policy of this newly listed company.


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August 2024

 1 Questions
Question 5a
​​Examine THREE types of dividend policies that might be adopted by a company.


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April 2024

 2 Questions
Question 4b
​ ​ ​​The following information has been extracted from the books of Bidii Ltd. for the year ended 31 December 2023:

Earnings after taxes
Sh.3.75 million
Total dividends
Sh.2.25 million
Number of shares outstanding
500,000 shares
Cost of capital 
10% 
Rate of return on investments
12.5% 

Required: 
The theoretical market value of the company’s shares using the Walter’s model.


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Question 5b
​​The managing directors of three profitable listed companies summarised their companies dividend policies as follows: 

  • Company A has deliberately paid no dividends for the last five years. 
  • Company B always pays a low dividend per share (after adjusting for the general price index) and offer regular bonus issues. 
  • Company C always pays a dividend of 5% of earnings after taxation. 
Each managing director is convinced that his company dividend policy is maximising shareholders wealth. 

Required: 
Identify the dividend theory applied by each of the three companies.


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August 2023

 1 Questions
Question 4b
​​Describe FOUR forms of dividend payments that a company could use while making dividend decisions.


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April 2023

 1 Questions
Question 3b
​​Bright Moon Ltd. currently owns 100,000 outstanding ordinary shares with a market price of Sh.10 per share. The firm has Sh.1 million earnings after tax and intends to invest Sh.2 million during the year 2023. The firm is also considering declaring a dividend of Sh.5 per share at the end of the year. The firm’s opportunity cost of capital is 10%. 

Required: 
(i) The price of the share at the end of the year 2023 assuming dividend is not declared. 

(ii) The price of the share at the end of the year 2023 assuming dividend is declared. 

(iii) The number of new shares to be issued in (b) (i) and (b) (ii) above.


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December 2022

 1 Questions
Question 4a
​​Explain THREE factors that influence the dividend policy of a firm.


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August 2022

 1 Questions
Question 3d
​​Explain the following dividend theories: 
 
(i) Bird-in-hand theory. 
 
(ii) Clientele effect theory. 
 
(iii) Information signaling theory.


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April 2022

 1 Questions
Question 1b
​​State five arguments against Modigliani and Miller's (MM's) view that dividend policy is irrelevant as a means of affecting shareholders' wealth.


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December 2021

 1 Questions
Question 4c
​​Arctic Developers Ltd. deals in the construction and sale of residential homes. The company is evaluating different forms of paying dividends to its shareholders. 

In relation to the above statement, advise the company on four forms of paying dividends that it could adopt.


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September 2021

 1 Questions
Question 2a
​ ​ ​​Maridadi Ltd. is a firm that operates in the textile industry. The firm's operating profit, that is, earnings before interest and tax (EBIT) over the next five years are forecasted as follows:

Year
2021
2022
2023
2024
2025
Operating profit (EBIT) Sh. "000"
10,000
12,000
15,000
16,000
17,000

Additional information:   
1.
The firm expects to incur a fixed financing cost of Sh.20,000,000 in the year 2021. This is expected to rise at a constant rate of 10% each year. 
2.
The firm's acceptable investments to be financed each year are given as follows:
2.
Year
2021
2022
2023
2024
2025
Acceptable projects Sh. "000"
3,000
4,500
5,000
6,500
7,000
3.
Corporation tax rate is 30%.
4.
The number of issued ordinary shares are 10,000,000. These are expected to remain constant each year.

Required
(i)
Dividend per share (DPS) payable in each year assuming the firm adopts 40% payout ratio as its dividend policy.
(ii)
Dividend per share (DPS) payable in each year assuming the firm adopts a residual dividend policy.


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May 2021

 1 Questions
Question 2b
​​Describe four factors that could affect a company's dividend policy.


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November 2020

 1 Questions
Question 5b(i)
​​​(i). ​Walter's model on dividend policy believes in the relevance concept of a dividend. According to this concept, a dividend decision of the company affects its valuation.
     
      Required:
      Discuss four assumptions of Walter's model,


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May 2019

 1 Questions
Question 1a
​​Explain the following dividend theories: 

(i) Information signalling theory. 
(ii) Tax differential theory. 
(iii) Bird-in-hand theory. 
(iv) Agency theory.


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November 2017

 1 Questions
Question 2a
​​Explain four limitations of dividend growth model.


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May 2017

 2 Questions
Question 5a
​​Highlight four factors that might influence a company when establishing a dividend policy


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Question 5d
​​Downtop Ltd. has achieved earnings of Sh.6 million this year and the company intends to pursue a policy of financing all its investment projects from retained earnings. There are a number of investment opportunities available for Downtop Ltd., although if it does not undertake any of the projects, its annual retained earnings are expected to remain at Sh.6 million in perpetuity.

The following information is available for Downtop Ltd.:

Proportion of retained
earnings
(%)
0
30
45
Growth rate in
earnings
(%)
0
6
9
Required return on all
investments by shareholders
(%)
16
17
19

Required: 
Using dividend growth model, determine the optimum retention policy for Downtop Ltd.


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May 2016

 3 Questions
Question 2b
The following information relates to the dividend per share (DPS) for Zomollo Ltd.:

Earnings per share (EPS) for year 2016
Dividend per share (DPS) for year 2015
Target payout ratio
Adjustment rate		Sh.6.00
Sh.2.40
0.60
0.70

Required:
Using the Lintner model, predict the dividend per share for the year ended 31 December 2016.


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Question 4c
​​Ngoba Ltd. has just paid an annual dividend of Sh.38 per share. The management of the company has a target to increase the market share value to Sh.800 per share by considering appropriate investment policies. Shareholders expect a return on investiment of 12%.

Required:
The annual expected growth rate.


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Question 5b
​​Highlight four factors that could be taken into account when making dividend decisions.


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November 2015

 1 Questions
Question 2d
The following data was extracted from the financial statements of Kapecha Limited as at 30 September 2015:


10% preference shares (Sh.10 par value)
Ordinary shares (Sh.10 par value)

Retained earnings

15% debentures

Sh."million"
16
16
32
28
60
48
108

The company's net profit before interest was Sh.80 million. The company's dividend pay-out ratio was 50%. Corporate tax rate is 30%.

Required:
Dividend per share (DPS).


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