Impact of Dividend Policy on Capital Structure

An internship report submitted in partial fulfillment of the requirement for the Degree of Bachelor of Business Administration

Baker et al. (2012) investigate factors that lead to the decision not pay cash dividends from Canadian mangers' perspective. The evidence shows that growth expansion opportunity, low profitability and cash constraints as the major causes underlying firms' decision not pay dividends. Also the results suggest taxations is at best second order as determinants of dividends.

Generally, the report team have a well-presented PowerPoint presentation about their analysis of dividend policy at FPL group Inc. They have demonstrated the process of how they come up with these results briefly. They have also examined the company’s history, financial figures and some related industry information, and gave reasonable recommendations. The report team expected that the company would most likely to hold their currently dividend policy and suggested their clients to sell the company shares in short term.

4.Understand the tools in corporate finance and apply them to solve the key issues in

the expected results: (1) Characterizing the rm 's optimal equity issuance and dividend pay out

The provision of dividends is always associated with several problems in the process. Paying dividends regularly can easily lead to unrealistic expectations among the shareholders. Any irregularity in a dividend provision policy might raise issues of discontent among the investors or parties dependent on it, which results in the pressure on the company to maintain the dividends, such as the Linear Technology; they will have to maintain their policy of increasing the dividend’s percentage. Therefore, a company’s bad or poor performance that might affect the dividends is easily realized by the investors, which is disadvantageous for business.

Managers adjust dividend payments and send the information about the firm’s future prospect to outsiders. This way may be too costly for firms with lower quality to follow (Bhattacharya, 1979). Moreover, the lower quality firms should not be able to mimic the announcement of increase dividend and signal false dividend payouts to outsiders. This dividend signaling policy is credible to eliminate adverse selection problem. The signals could help investors to distinguish firms’ quality in the financial

Background: On April 28th, 1998, Robert Steacy will meet with the board of directors to discuss his memorandum stating the pros, cons and recommendations with respect to the amount of regular dividends, special dividends and share repurchases. This company is a broadly based

In this section we will provide an overview of the dividend paying firms that will be analyzed in the research. Information will be introduced regarding such factors as the average return that these companies are paying and what other investments are offering investors.

Whether or not (and the extent to which) dividends would be paid from the earnings of a public limited company depends on the dividend policy adopted by its management. In early corporate finance, dividend policy referred to a corporation’s choice of whether to pay its shareholders a cash dividend or to retain its earnings. The policy also addressed the frequency of such payments of dividends (whether annually, semiannually or quarterly) and how much the company should pay if it decides to do so. The optimum dividend policy of a firm depends on investor’s desire for capital gains as opposed to dividends, their willingness to forgo present dividends for future returns, and their perception of the risk associated with postponement of returns.

Dividend is that part of earning which is distributed among the shareholders. The decisions about when and how much earnings should be paid as dividends is part of the firm 's dividend policy. It is irrefutable that dividend policy is controversial issue as some people opine that dividends are relevant for the valuation of company and others think that dividend does not effect the market price of shares and valuation of firm. Besides this, the market where long term investment like share bonds are traded is capital market. In the following paragraphs, i will put my emphasis on both issues the dividend relevance theory along with roles and importance of capital market.

All of the firm’s decision regarding dividend policy depends on their stockholders preferences who appoint the Board of Directors and deciding that decision which is effective for both corporation as well as stockholder. Basically two types of investors are available in our industry; some prefer current return or other chose to maximize their wealth. Following figure differentiated this concept in detail: -

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

A dividend is the part of a firm`s earnings that are paid to the shareholder, either in monetary terms or as shares. In the UK, dividends are paid by UK-quoted companies semi-annually and are taxed depending on an individual`s income (Arnold, 2008 & GOV.UK, 2015). According to the Financial Times (2015) however, a dividend payment to shareholders is not an obligation, in fact a business`s board of directors are able to opt whether they desire to make a dividend payment or not, depending mostly on the health of the business. If so, the dividend payment to shareholders is made from a firm`s accumulated profits or reserves pots, with the anticipation that the firm can cover this withdrawal of monetary funds by injecting further cash quickly and efficiently into the firm or shareholders may receive dividends in forms of shares, in this situation, a firm is unlikely to lose much as shareholders would be likely to reinvest into the firm. Conversely, if a firm`s board of directors opt the opposing decision, not to make a dividend payment, this is likely to be due to a firm supporting an insufficient cash-flow or the monetary fund’s being identified as needed urgently for more meaningful purposes, such as reducing debt (The Financial Times, 2015). Despite this, the main question in consideration is: whether a rational investor considers dividends when determining the value of shares? In order to answer this question effectively, this essay shall commence further through exploring

Thus the relation between dividends and share value is not precise and finance managers must clearly understand the various factors impacting the dividend policy when deciding how to allocate a firm’s earnings.