This essay aims at providing an understanding of dividend policy by reviewing the existing theories on dividend policy, the practical and operational issues of the policy and the factors influencing the policy. Additionally, this essay looks at the dividend policy that is used in Maldives business and will use evidence from Maldivian business environment. Dividend policy refers to the set of rules or guideline that a company uses to decide how much of its profit it will payout to the shareholders. Cash dividend and dividend payment Cash dividend is money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. Not all companies pay a dividend. Usually, the board of directors determines if a dividend is They say that dividend policy is irrelevant and is not deterministic of the market value. Therefore, the shareholders are indifferent between the two types of dividends. All they want are high returns either in the form of dividends or in the form of re-investment of retained earnings by the firm. Two important theories discussed relating to the irrelevance approach, is the residuals theory and the Modigliani and Miller approach. Theory of dividend policy Residual theory This theory suggests that dividend payments should be viewed as the amount left over after all acceptable investment opportunities have been undertaken. Overall, this theory suggests that no cash dividend is paid as long as the firm’s equity need is in excess of the amount of retained earnings. Also, it suggests that the required return demanded by stockholders is not influenced by the firm’s dividend policy an argument that in turn suggests that dividend policy is Investors would like to receive larger cash dividends because of inflation. But from the firm’s viewpoint, inflation causes it to invest substantially more to replace existing equipment, finance new capital expenditures, and meet permanent working capital needs. Thus, there may be a tendency to hold down cash dividends. The amount of growth a firm can sustain and its profitability is related to its dividend decisions, so long as the firm cannot issue additional equity. The protective agreements in a bond indenture or loan agreement often include a restriction on the payment of cash dividends. This restriction is imposed to preserve the firm’s ability to service its
Corporate Payout Policy Corporate Finance Mitchel Toman-20080713 Signaling theory and Miller and Modigliani’s (MM) dividend irrelevance theory are two approaches to payout policy that oppose each other. Through analysing the recent payout policies of major firms in today’s financial market and investigating the literature on the theories we can see some of the assumptions of MM’s theories can’t be true. Asymmetry of information and investment policy are a part of the financial world and prevent…
their company’s dividend payout policies. In their eyes it is seen as imperative that a consistent level of dividend per share is maintained to prevent inadvertent suggestions of reduced performance. Due to the need to present stability and avoid cuts to payouts managers will often look to external capital for funding investments rather than reduce internal cash and cutting dividends. This emphasis managers put on keeping a consistent payout policy is contradictory to the theory put forth by Franco…
Question Two. Question 2A A company`s dividend policy is referred to the choice of companies if to pay out cash, in what fashion or in what amount should they pay their shareholders, (Brigham et.al, 2011). The important part of this policy is the decision of the company whether to pay a cash dividend, the amount this cash dividend should be as well as how regular the cash dividend should be allocated. In actual fact, dividend policy entails the decisions making by the company such as…
Technology Current Payout Policy? Linear Technology (LT) is like many firms where it used a combination of dividend payments and share / stock repurchases to distribute cash to its shareholders. With a cash dividend, cash is paid directly to shareholders while, with a stock repurchase, a firm uses its cash to buy back its own shares from the market which in turn reduces the number of outstanding shares (Titman and Keown et al., 2011). LT wanted to be able to attract different dividend clienteles of investors…
Question The dividend discount model tells us that the value of a firm is equal to the present value of its expected dividend payments. Does this mean that these firms are worth nothing? Discuss with reference to academic research and theory. Answer 723 words It does not mean the firms are worth nothing when firms have never paid dividends and have no intention of doing so. The dividend policy has a significant influence on shareholders’ investment to gain more profits. The optimal dividend policy of a…
appreciate numerous dividend policy related issues. It considers most of the conventional factors in dividend policy decisions such as cash needs, target capital structure, sources of financing, signaling effect, clientele effect, and trend in the market. Questions to be answered: 1. What are the arguments for paying dividends? (Theory question; consult finance book) Signal. It signals to investors that the firm has cash in hand to pay cash dividend The company has a history of paying dividend. Omitting…
Dividend Policy at FPL Group Inc. Problem: On May 5, 1994 the utilities analyst of Merrill Lynch downgraded FPL Group Inc. due to an expectation of adjustment in dividend payments. The report also acknowledged the probability of a cut in the dividend. Kate Stark of First Equity Securities Corporation analyzes the situation and she has to predict what is going to happen. This investment alert was published dropped the stock price by 6% on the same day. 3 weeks ago Kate Stark has recommended a “hold”…
Payout policy at Linear Technology Outline Analysis of the general background Ability to return cash: funding requirement analysis Return cash or retain cash: Cost of retaining cash How to distribute General background Basic description: Exhibit 1 1986: first IPO 1992 starting paying dividends: increasing the div by about 0.01$ per share each year 2002: significant drop in sales: -47% in sales, - 54% in profit 2003: an other increase in dividend to 33.1% of payout ratio. Historical payout policy…
transition to a market economy many entrepreneurs and business leaders start to think more carefully about the way of efficiently organizing financial activities of the company, improving the management of financial resources and differentiating company’s policies and performance for firm’s future prosperity. This term paper addresses such issues for KazMunaiGas Exploration Production Company by the analysis of firm’s structure, corporate governance, financial statement and all other important factors that…
Clientele Effects Despite the implications of the MM theory which states that investors are able to engage in ‘home-made’ dividends in order to attain their preferred cash flow, in a world with transaction costs and more importantly, taxes, the dividend policy of a firm is generally tailored to the interests of its investors (DeAngelo & DeAngelo, 2004). Lintner (1965) states that once a firm initiates a dividend they are unlikely to reduce it many shareholders will likely sell their shares as they…