Textbook Problem

Discuss the pros and cons of having the directors formally announce a firm’s future dividend policy.

Summary Introduction

To Explain: Pros and cons of announcing the future dividend policy

Introduction:

Dividend Policy: It is the rules and regulations or protocol, which a company sets to share its earning with its shareholders. Dividend payment includes the payment to be made legally as well as financially.

Answer to Problem 1Q

There is various benefit of pre announcing the dividend policy but the most vital is that it minimizes the investor’s uncertainty.

Explanation of Solution

• As the uncertainty decreases it results in lowering capital costs and the increase in stock prices resulted in benefitting the directors as well as the company.
• Pre announcing dividend policy has some side effects too as it resulted in reducing the corporate flexibility.

Conclusion

As it has both negative and positive effect but it is better for the director’s to pre announce the dividend policy.