There\'s a text that cites a drawback to the residual theory of dividends, becau
ID: 2382523 • Letter: T
Question
There's a text that cites a drawback to the residual theory of dividends, because theory does not take into account how stockholders feel about receiving dividends. If a stockholder’s only concern is achieving the highest potential rate of return, receiving dividends has several downsides. For an instance, a shareholder may want to defer tax on the gain from a security, and receiving a dividend is a taxable event in the year in which it is received. On the other hand, many retired investors live off dividend income from their investments, and hence prefer a high dividend rate. Given the potentially differing attitudes towards dividends, how would you as a manager develop a corporate philosophy regarding dividends?
Explanation / Answer
Solution-
Dividends enhance earnings transparency of a company also increase corporate accountability and built management confidence for future growth.
As a manager the corporate philosophy regarding dividends is as follow....
Investors continue to benefit from the dividend and companies are paying and increasing there profit.