Impact of Capital Structure and Dividend Policy on Shareholders' Value

The capital structure of a company changes the risks exposure highlighting the need to determine the impact of debt levels on financial risk (Pearson Learning, 2014). The dividend payout is the ratio of dividends per share to the earnings per share, and both ratios increased for the three years. The increase in the DPS rose at a decreasing rate resulting in slower growth in the dividend payout. The dividend per share is dependent on the total number of dividends paid out in an interim year, and the increase in the DPS was in line with the management’s efforts to reward the investors as the earnings improved. The dividend yield representing the dividend paid out relative to the share price, and the lower divided yield in December 2014 can be attributed to the higher share price hovering over $40, which was more than double the share price in the previous

The factors that determined the dividend policy of firms were governed by the way firms could catch up from the crisis. The number of firms that resorted to dividend payout was dangerously low, but in 2011 the firms earnings having rebounded there have been nearly 1000 cases of increases and only 84 cases of decreases in firms which have started paying dividends . S&P 500 firms were seen to have paid approximately $200 billion in 2010 and the dividends to earnings pay out continues to remain very low .

Three main issues arise when it comes to dividend policy in firms. The first issue is whether

This theory believes that a dividend decision of the company affects its valuation. Prof. J.E. Walter has studied the significance of the relationship between internal rate of return (R) and cost of capital (K) in determining the optimum dividend policy which maximizes the wealth of shareholders.

Firms often view dividends as a commitment to their stockholders and quite hesitant to reduce an existing dividends. Once established, dividend cuts would adversely affect the firm’s stock price as a negative signal

When deciding on changes to dividend pay-out ratio, there are several factors which must be considered. This piece looks at the different underlying theories which affect management’s decision, before looking at what policy would be considered best for FPL and how to implement a change.

In this paper the impact of dividend policy of the companies on the firm’s share prices is analysed and different views in the context of the semi-strong form of the efficient market hypothesis are contrasted. The overview of the traditional and most recent empirical investigations of the stock market reaction to the dividend announcements is provided and different findings are discussed and compared.

The purpose of this paper is to help management must decide on the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash.

Dividend policy remained an issue for many researchers of the finance field. The main question regarding the dividend policy is that whether it is the cause of variability in the prices of the stock or not? this question is still a mystery for the finance related researchers. Dividend can be simply defined as “the residual

Symbolically, P = [m (D+E/3)]  Where P is the market price,  M is the multiplier,  D is dividend per share,  E is Earnings per share.  Drawbacks  of  the  Traditional  Approach:  As  per  this  approach,  there  is  a  direct  relationship  between P/E ratios and dividend pay­out ratio. High dividend pay­out ratio will increase the P/E ratio  and low dividend pay­out ratio will decrease the P/E ratio. This may not always be true. A company’s  share prices may rise in spite of low dividends due to other factors.  15.3 Dividend Relevance Model  Under this section we examine two theories – Walter Model and Gordon Model.  15.3.1 Walter Model  Prof.  James  E. Walter  considers  dividend  pay­outs  are  relevant  and  have  a  bearing  on  the  share  prices  of  the  firm.  He  further  states,  investment  policies  of  a  firm  cannot  be  separated  from  its  dividend  policy  and  both  are  inter­linked.  The  choice  of  an  appropriate  dividend  policy  affects  the  value of the firm. His model clearly establishes a relationship between the firm’s rate of return r, its  cost of capital k, to give a dividend policy that maximizes shareholders’ wealth. The firm

Business finance exerts a significant impact on individuals as well as companies nowadays. Knowledge about finance fills so many books to equip financial managers to create more benefits for the company. As a financial manager, one primary duty is maximising the wealth of the firm by making correct decisions. This report will focus on the three main tasks of a financial manager, name investment decision, financing decision and dividend decision. Firstly, we will state our understanding of these terms in detail. Then, several quantitative models will be introduced about how to make correct investment decision, and we will explain the relevant qualitative issues that should be considered. In addition, we will discuss the

The purpose of the article is to find whether there is a relationship between institutional holdings and payout policy in U.S. public firms between 1980 and 1996. In the begging there is an abstract, that states the aim of the research and the reached findings. There are 7 sections in the article. The first one is introduction, where the authors explain what results are reached and carefully introduce the readers to the structure of the article. In the next section the hypotheses is derived. After that, section 3, the variables and the data is described. The tests begin from section 4 to section 6. In those sections the authors use non-parametric tests, regression analyses and vector autoregressive specifications in order to reach their results. The last section is the conclusion of the article, where the major findings are listed. The authors find that institutions prefer firms that pay dividends to ones which don 't. Moreover, within dividend-paying firms, institutions are not attracted to high dividends. They also find a positive relation between repurchases and institutional holdings. Their results also suggest that institutions prefer firms that repurchase regularly to firms that repurchase sporadically. They don 't find evidence that an increase in institutional holdings in firms is followed by an increase in dividends or repurchases. Their article has been cited 412 times by other authors.

The link between dividends and firm’s value and share price has been the subject of study for a few decades. However, the influence of dividends on the value firms’ value and price remains unresolved. Some studies pointed out that stock prices remain unaffected by the announcement of dividends (Sharma, 2011; Pan et al., 2014), while others reported otherwise, whether positively (Liu and Chi, 2014; Perepeczo, 2014) or negatively (Abbas, 2015; Mamun, 2013). Information signaling theory, the free cash flow hypothesis, and the dividend clientele effect hypothesis are the three major theories that explains the influence of dividend announcements upon share prices (Kadıoğlu et al., 2015; Nour, 2003).

Since investors do not need dividends to convert share value to cash, dividend policy will have no impact on the value of the firm, this is because investors can create cash by using homemade dividends. In addition, a persuasive argument claimed by Miller and Modigliani (1961) that dividend policy does not matter, in other words, dividend policy is irrelevant to the shareholder’s wealth. However, dividend irrelevance argument must under certain assumptions: 1) there exist a perfect capital market which means no taxes or transactional cost, free and costless access to the market information; 2) investors agree on the expected cash flow from a given investment; 3) no agency cost; 4) financing decision and investment decision are independent; 5) investors can borrow and lend at the risk free rate.

There are many theoretical and empirical results describing the decisions companies make in this area. At the same time, however, there is no generally accepted model describing payout policy. Moreover, empirical findings are often contradictory or difficult to interpret in light of the theory. In their seminal paper, Miller and Modigliani (1961) showed that under certain assumptions dividends are irrelevant; all that matters is the firm’s investment opportunities. Miller and Modigliani considered the case of perfect capital markets (no transaction costs or tax differentials, no pricing power for any of the participants, no information asymmetries or costs), rational behaviour (more wealth being preferred to less, indifference between cash payments and share value increases) and perfect certainty (future investments and profits are given). In real life, however, people seem to care about dividends. Lintner.s (1956) classical study on dividend policy suggests that dividends represent the primary and active decision variable in most situations. Lintner suggests a model of partial adjustment to a given payout rate.