Financial Devidend Policy
Part A
1. The dividend policy
Ordinary dividends are defined as cash from the company 's profit distribution to shareholders (Garvey, G. T. and Swan, P. L. 1994). In other words, the dividend is the share of company profits for investors, to give for the investors a share of capital. Companies are able to distribute free cash flow by paying a dividend and trusts are able to distribute free cash flow by paying a distribution. Dividend policy refers to the decision by companies to pay out net profit or retained earning to shareholders as dividend or alternatively to reinvest those profits as retained earning (Dunstan, B 1992). One of the biggest wish of shareholders is receiving high dividends. However, a high dividend rate is not really a sigh of successful business. An unreasonable high dividend policy will be considered as a “milking machine”, which will squeeze the capital that business needs to reinvest.
2. The importance of Dividend policy
When a company generates free cash flow, it can retain all or part of this cash flow for future use or, alternatively, it can pay a dividend to its shareholders. The dividend policy decision is tied directly to the financing of a company (Walker, S. and Partington, G 1999).
There are three criterion include: the foundational concept, the managerial considerations and the design approach, that are needed to critically evaluate the importance of an effective dividend policy.
a. The foundational concept
Company may also elect to pay special dividends. This allows companies to pay additional one-off dividends to their shareholders. (Brown, P and Clarke, A 1993). Dividend decisions of firms are considered as a message, which can be dissected and evaluated the financial condition as well as business operations and management capability. This is reflected from the fact that a dividend decisions of firms the market can be evaluated positively or negatively by the rise or fall of stock prices. Reasonable
1. The dividend policy
Ordinary dividends are defined as cash from the company 's profit distribution to shareholders (Garvey, G. T. and Swan, P. L. 1994). In other words, the dividend is the share of company profits for investors, to give for the investors a share of capital. Companies are able to distribute free cash flow by paying a dividend and trusts are able to distribute free cash flow by paying a distribution. Dividend policy refers to the decision by companies to pay out net profit or retained earning to shareholders as dividend or alternatively to reinvest those profits as retained earning (Dunstan, B 1992). One of the biggest wish of shareholders is receiving high dividends. However, a high dividend rate is not really a sigh of successful business. An unreasonable high dividend policy will be considered as a “milking machine”, which will squeeze the capital that business needs to reinvest.
2. The importance of Dividend policy
When a company generates free cash flow, it can retain all or part of this cash flow for future use or, alternatively, it can pay a dividend to its shareholders. The dividend policy decision is tied directly to the financing of a company (Walker, S. and Partington, G 1999).
There are three criterion include: the foundational concept, the managerial considerations and the design approach, that are needed to critically evaluate the importance of an effective dividend policy.
a. The foundational concept
Company may also elect to pay special dividends. This allows companies to pay additional one-off dividends to their shareholders. (Brown, P and Clarke, A 1993). Dividend decisions of firms are considered as a message, which can be dissected and evaluated the financial condition as well as business operations and management capability. This is reflected from the fact that a dividend decisions of firms the market can be evaluated positively or negatively by the rise or fall of stock prices. Reasonable
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