Notes On The Value Of Dividend Policy

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2.1.1 Meaning of Dividend Dividends refers to the returns from investments in shares of Equity, they are simply the distribution of a firm’s profits (Net of Tax) to its Shareholders. In case of profit generation, every firm has two options; whether to retain the money for future investments, and in this case it would be called retained earnings, or distribute it to Shareholders in one of the forms of dividends described below. The decision of whether to retain the profits or distribute dividends, and the form of distribution is known as the Dividend policy which has to be suitable for both the firm and its shareholders. The criticality and importance of such policy is attributed to the fact that it has an impact on a firm’s Capital…show more content…
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. 2.1.2 Types of Dividend As mentioned earlier, dividends distribution may take multiple forms, below are some of the most common ones. 1) Cash Dividends: Which is the most common method of Dividends payment for its psychological effect on shareholders who usually prefer to collect their returns immediately and in Cash rather than a non-cash form. The problem is that this form of dividends is limited to the availability of cash at the time of declaration and afterwards distribution. And since the balance of retained earnings does not reflect and has no relation with that of Cash, a corporation may not necessarily be able to raise enough cash for dividends payments despite having a large balance of Retained Earnings. The immediate impact of cash dividends is the reduction in balances of both total assets and shareholders’ equity along with its impact on the share price. Most firms prefer that form for it creates a favorable image for the firm and its profitability. On the other hand, some firms decide against cash distribution sometimes due to cash limitation and liquidity issues and in that case the following forms of non-cash
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