Study Document
Pages:2 (577 words)
Sources:2
Document Type:Essay
Document:#52113959
THE RELEVANCE OF PAYOUT POLICIES The Relevance of Payout PoliciesIs dividend policy irrelevant?The dividend irrelevancy theory advanced by Modigliani and Miller argues that dividend pay-out has no effect on firm value and hence, dividend policy is irrelevant (Amidu, 2007). The theory argues that excess cash inflows could instead be reinvested into the company to stimulate future growth. Proponents of dividend pay outs argue that dividend-payment creates an impression of honesty among investors, it indicates that the company is generating real earnings, and minimizes the risk of overinvestment in projects with negative net present value (NPV) (Amidu, 2007). However, in my view, dividend policy is irrelevant for two major reasons.First, investors will usually create their own cash flows regardless of the companys dividend policy. Every investor expects a certain amount in dividends. If the pay-out policy is such that the investor receives a higher dividend than they expect, they can use the surplus to purchase more stock in the company. Alternatively, if they receive lower dividends than they expect, they could sell some of their shares and end up with the same cash flow to match what they expected. Secondly, regardless of the dividend policy, the after-tax rate of return on…
…shareholders.How should managers use this information to make decisions about how to return capital to shareholders?In summary, if a company fails to pay dividends and instead ploughs the same back to produce higher future returns by expanding operations and increasing efficiency, then the management can pay low dividends without negatively affecting shareholder value as shareholders would develop their own cash flows to offset the low dividend. At the same time, if the company ends up producing lower future returns by say earning little or investing in non-profitable projects, then it could increase shareholder value through more efficient alternatives such as share…
Study Document
Dividend Tax Capital gains and dividend taxes were both initiated in the early 1970's, by the Democratic Party. Before dividend taxes were enforced, the government made its money through higher aftertax yields, The dividend tax was originally supposed to be a progressive measure, so that the wealthiest paid correspondingly more than the poorest because they had benefited more. At this time, only the wealthy invested in stocks. This is no longer
Study Document
However, theoretically, they could experience a dramatic increase in the future, if the company is run well. According to the article in Forbes magazine entitled "A Progressive dividend policy," the final outcome for Progressive shareholders is likely to be an increase in profits during most ordinary, reasonably profitable years, although now dividends will be paid annually rather than quarterly (Carlson 2006, p.1). (This may also be seen as a
Study Document
Therefore, 'on balance, much empirical evidence supports the view of dividends as a signaling device'. There have been reported instances when the management has deliberately reduced the expected worth of the dividend, considered to be a strategic decision aimed at the improvement of the financial flexibility and growth prospects on long-term scale. However the managers of the company have practiced such options, where they have 'used dividend actions to convey
Study Document
Dividends A regular cash dividend is paid out of the company's cash supply. The dividend can be at a fixed rate, or can be loosely tied to the company's net income. This is the most common form of dividend, and is paid under most circumstances. Whereas a regular cash dividend is a recurring dividend, an extra cash dividend is a non-recurring dividend (Investopedia, 2012). This is a one-time dividend that is
Study Document
Dividend Policy What are the practical considerations which are likely to influence a firm's dividend policy? Does a firm's dividend policy matter? Inside a firm's dividend policy there are a number of different factors that will have an impact upon: the amount and if one will be paid to shareholders. The most notable include: the growth rate of the company, credit agreements, earnings stability, maintaining control over the float, uncertainty, the ability
Study Document
Even their regular dividends were increased from 8 cents per share per quarter to 16 cents. This is quite a high rate of increase. This sort of announcements was also made by banks like Wachovia and Mellon, and consumer staples like Altria and Kraft. The attitude of the investors can be seen from the fact that the companies which have traditionally paid dividends have performed better in terms of