The following scenario relates to questions 49–53.
The following are extracts from the last Board meeting at Zee plc, a quoted high street retailer based in Country A. Zee plc sources some products, such as food and clothing, from third party suppliers but also makes some of its own products, such as furniture. The context of the discussion is a plan to close a domestic furniture factory and build a new one in a cheaper country.
CEO: I think we should be more cautious about going ahead with plans to build a new factory in Country B as I’ve looked at their forecast inflation rates and they are higher than expected. This would send our costs sky high when the reason we want to build it is to save money. However, if we cannot boost profits, then I fear we will have to cut the next dividend, something that will be disastrous for our shareholders who will then sell our shares en masse.
Director A: Surely the exchange rate will move to compensate for the difference in inflation, so it won’t make a huge difference?
Director B: I think the key issue is improving reported profit – that is the main way we can keep our shareholders happy, which is, after all, our job. Sacking people in Country A will only result in a boost to the share price due to the cost savings – as long as we keep shareholders informed, that is.
Director C: I think we should be more worried about what is happening in our own country – the Government is talking about restricting the money supply to control excessive costpush inflation.
Director D: I have some good news – the government has blocked a proposed merger between W plc and X plc (two rivals of Zee plc) on competition grounds.
49. Which TWO dividend concepts/theories are consistent with the CEO’s fears over the cut in dividend?