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Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investment.
- a. Explain what a residual dividend policy implies, illustrating your answer with a table showing how different investment opportunities can lead to different dividend payout ratios.
- b. Think back to Chapter 13 where we considered the relationship between capital structure and the cost of capital. If the WACC-versus-debt-ratio plot was shaped like a sharp V, would this have a different implication for the importance of setting dividends according to the residual policy than if the plot was shaped like a shallow bowl (a flattened U)?
a.
To explain: Residual dividend policy and the effect of different investment opportunities on different dividend payout ratio.
Introduction:
Dividend Policy:
It is the rules and regulations or protocol, which a company sets to share its earning with its shareholders. Dividend’s payment include payment to be made legally as well as financially.
- The residual dividend policy is a premise based and new common stock costs more than the retained earnings so a firm must use all its retained earnings to fulfill the common stock need.
- If the profitable investment opportunities are large in number for a firm ...
b.
To explain: WACC versus debt ratio implications for the significance of setting dividends as per the residual policy if the plot was shaped like a shallow bowl than V.
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