FIN 550 Grand Canyon University Capital Structure Questions
The purpose of this assignment is to explain core concepts related to cash distributions and capital structure.
Read the Mini Case. Using complete sentences and academic vocabulary, please answer questions a (1) and (2).
While APA style is not required for the body of this assignment, solid academic writing is expected.
This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.
Mini Case 5
Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt
Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop
and manufacture miniature microwave frequency directional transmitters and receivers
for use in mobile Internet and communications applications. IWT’s technology, although
highly advanced, is relatively inexpensive to implement, and its patented manufacturing
techniques require little capital as compared to many electronics fabrication ventures.
Because of the low capital requirement, Jackson and Smithfield have been able to avoid
issuing new stock and thus own all of the shares. Because of the explosion in demand for
its mobile Internet applications, IWT must now access outside equity capital to fund its
growth, and Jackson and Smithfield have decided to take the company public. Until now,
Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested
all after-tax earnings in the firm, so dividend policy has not been an issue. However,
before talking with potential outside investors, they must decide on a dividend policy.
Your new boss at the consulting firm Flick and Associates, which has been retained to
help IWT prepare for its public offering, has asked you tomake a presentation to Jackson and
Smithfield in which you review the theory of dividend policy and discuss the following issues.
a. (1) What is meant by the term “distribution policy”? How has the mix of dividend
payouts and stock repurchases changed over time?
(2) The terms “irrelevance,” “dividend preference” (or “bird-in-the-hand”), and “tax
effect” have been used to describe three major theories regarding the way dividend
payouts affect a firm’s value. Explain these terms, and briefly describe each theory.