Examples Of Constructive Dividends

* However, if these payments are unreasonable, then distribution is considered a ‘constructive dividend’ and is no longer deductible

When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends

* A taxable dividend is defined as one other than a tax-free capital dividend or

Dividends should be made cumulative and issuable upon a liquidation event or an IPO. Such dividends may be converted, if the holder desires, to common shares. This will encourage management to seek a quicker exit.

This question is designed to focus the class on the share repurchase program as a critical use of funds for 2006. The primary advantage of share repurchases using dividends is that management can turn share repurchases off and on as allowed by cash flow. The other projected uses of funds, however, are largely driven by business issues that are not as flexible for management. Students should notice that

Dividend Policy | -Pay out dividend to shareholders in profitable period | -100% plowback to reinvest in the business |

A cash dividend is a cash payout from a stock. Investors receive a fraction of the issuing company’s retained earnings, based on the number of shares they own. A stock dividend is a payment in the form of additional shares. The company pays dividends in the form of additional shares of stock instead of cash. Companies usually distribute either kind of dividend to reward their stockholders’ since they are not required to pay or offer anything. Cash dividends affect the company’s retained earnings, which affects the stockholders’ equity. Stock Dividends does not affect the total stockholders’ equity. Stock dividends are transferred from Retained Earnings to Contributed Capital. Yes, the action that Sandra Bass has proposed is ethical.

The dividends to Kennecott equal to the difference between Carborundum’s net income after adjustment and the profit retention. The methodology Kennecott’s management team used to determine the value of Carborundum to Kennecott was evaluated using an incorrect set of cash flows. First, it subtracted out the profit retention requirements needed to support Carborundum’s growth even though Kennecott would own the full equity in Carborundum, which is incorrect. Second, depending on the method used to value the company, the relevant set of cash flow is needed to be determined, either the free cash flow to the firm or the free cash flow to equity.

Some argue that increasing dividend payments increases a firm’s value. Another view claims that high dividend payouts have the opposite effect on a firm’s value; that is, it reduces firm value. The third theoretical approach asserts that dividends should be irrelevant and all effort spent on the dividend decision is wasted. These views are embodied in three theories of dividend policy: high dividends increase share value theory (or the so-called ‘bird-in-the- hand’ argument), low dividends increase share value theory (the tax-preference argument), and the dividend irrelevance hypothesis. Dividend debate is not limited to these three

Generally, a constructive dividend is unique from an ordinary dividend in many different ways. A constructive dividend is a form of payment to the shareholders from a corporation which can cause in financial benefits to its shareholder. Section 316(a) defines a dividend as any distribution of property (money, securities, and any other property except stock) that a corporation makes to its shareholders out of its current and accumulated earnings and profits after February 28, 1913. In other hand, a constructive dividend is a payment made by a corporation, which benefits to a shareholder even if the payment is made indirectly to the shareholder, and even there is no formal dividend declaration. Similarly, for tax purposes, the constructive dividend and normal dividend are treated the same as actual distributions, which are taxable to the shareholders to the extent of the current and accumulated earnings and profits of the corporation.

has to allocate more income for retained earnings. The more you retained, the lesser dividend available for the stockholders

The Reguero-Almandeel-Purohit Company uses a business organization known as a corporation. The term means that an enterprise gives restricted risk to the investors. As from its definition, none of the shareholders in the organization is committed to the obligations of the company; banks can look just to the partnership's available assets as payment (Zhang et al., 2006). The enterprise records its particular expense form and pays taxes on its wages. If it happens that the organization conveys some of its profit to be dividends, then it will not deduct the profit in tax computation, yet the shareholder-beneficiaries must pay charges on those profits despite the fact that the company has paid assessments on its income.

Shareholders of the company in the form of dividends and as the directors of the company may think fit and to issue bonus shares, as fully paid up, in favor of the shareholders of the company.

Watts (1973) examined 310 firms for a period from 1946 to 1967 to find the evidence of a hypothesis that a firm’s future can be predicted using dividend changes. The tests took place in year t+1 for the future earnings and t, t-1 for the dividend levels. From the examinations, he concluded that generally the information content of dividend announcement could only be trivial (Watts, 1973).

Paying dividends will reduce the available funds of the company but is a way to increase shareholder value. Increasing or decreasing of DPR spells out the standing of the company to its shareholders. Reduction or not giving dividends for a period will reduce AFN but will mean that the company is struggling to provide enough profit. Shareholders may see this as a signal that further investments for the company are riskier.