Integrated Waveguide Technologies, Inc.

Integrated Waveguide Technologies, Inc. (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 required little capital as compared to many electronic 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 earning 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 a the consulting firm Flick and  Associates, which has been retained to help IWT prepare for its public offering, has asked you to  make a presentation to Jackson and  Smithfield in which you review the theory of dividend policy and discuss the  following issues.

a.