Once a company earns a profit, it must decide whether to retain the earnings for reinvestment in the company or pay dividends to shareholders. If paying dividends, the company may establish a dividend policy that impacts investors' perceptions. The decision depends on the company's current and future situation as well as investors' preferences. Dividends are paid from current or past earnings and can affect a company's capital structure by increasing equity relative to debt. Companies must choose whether to retain or distribute profits, with retaining suitable for growth companies and distributing suitable to maximize shareholder wealth.
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Dividendpolicy
1.
2. • Once a company makes a profit, they must decide on what
to do with those profits.
• They could continue to retain the profits within the company,
or they could pay out the profits to the owners of the firm in
the form of dividends.
• Once the company decides on whether to pay dividends,
they may establish a somewhat permanent dividend policy,
which may in turn impact on investors and perceptions of
the company in the financial markets.
• What they decide depends on the situation of the
company now and in the future.
• It also depends on the preferences of investors and potential
investors.
3. • Dividends are payments made to stockholders
from a firm's earnings, whether those earnings
were generated in the current period or in
previous periods.
• Dividends may affect capital structure.
• Retaining earnings increases common equity
relative to debt.
•Financing with retained earnings is cheaper than
issuing new common equity.
4. • There are basically two options which a firm
has while utilizing its profits after tax.
– Ploughing back the earnings by retaining them
– Distribute the same to the shareholders.
• Option I is suitable for firms which need funds to
finance their long term projects, which have
growth potential and sufficient profitability.
• Option II is suitable for those firm whose
objective is to maximize the shareholders
wealth.
5. Dividend Relevance Model
• Traditional Model
• Walter Model
• Gordon Model
Dividend Irrelevance Model
• Miller & Modigliani
Position
