Companies dividend policy

Type :

Term papers

Pages :

23 pages

Format :

.doc

Published date :

07/11/2006

Category :

Economics & finance

Sub category :

Finance

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Summary :

Introduction
Background on dividends and the three basic theories
1. Background
2. Different types of dividends
3. Procedural aspects of paying dividends
4. Irrelevance of Dividend Policy
5. Assumptions of irrelevance theory
6. The proof of the dividend irrelevance theory
7. Tax Preference theory
8. The history of dividend taxation
9. Double taxation
10. The proof of the tax preference theory
11. The 'Bird in the hand' theory
12. The wrong reasons for paying dividends
13. Good reasons for paying dividends
Dividend Policy in practice
1. Confusion of empirical tests and factors that influence the Dividend Policy
2. Signalling
3. The clientele effect
4. Dividend stability
5. Residual dividend model
6. Share repurchases
7. Stock dividends
8. Stock split
9. Setting a Dividend Policy
10. Payout ratio
11. Types of dividend payouts
Conclusion
Bibliography
Appendixes

Abstract

dividend policy is one of the most important financial policies, not only form the viewpoint of the company, but also from that of the shareholders, the consumers, the workers, regulatory bodies and the Government. For a company, it is a pivotal policy around which other financial policies rotate. Value of the corporate securities depends to a great extent on dividend and, therefore, in deciding upon the financial structure of a company, dividend has to be assigned due consideration.
Once a company makes a profit, the board of directors must decide 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 a company decides to pay dividends, there should be established a somewhat permanent dividend policy, which would impact on investors and perceptions of the company in the financial markets providing information concerning the firm's performance. The choice of the appropriate dividend policy depends on the preferences of investors and potential investors as well as on the company's capital structure and its future plans.
The board of directors holds a fiduciary position both with regard to the company as well as shareholders. The board of directors must combine the three decisions pertaining to investment, financing and dividends simultaneously as these three decisions are interrelated. dividend policy decision influences the financing decision of the firm through retained earnings. Financing decision would relate to the amount of funds to be raised from external sources as the investment needs of a firm can be fulfilled by a combination of retained earnings and external financing. Therefore, higher the amount of retained earnings, given the investment needs, lower will be the need for external finance and vice-versa.