Please help with the following, the options for each of the equestions are: 1. D
ID: 2702236 • Letter: P
Question
Please help with the following, the options for each of the equestions are:
1. Decreasae the ability to pay dividends
2. Increase the ability to pay dividends
Use the table to indicate how a firms ability to pay a dividend is affected by the facotrs described. Three such factors are described: Profitability ( an increase in net income), investment opportunities, and capita strucute ( and increase in the debt ratio.)
Factors:
Net income ?
More profitable investment opportunites are availabe ?
'The firm increases its debt ratio ?
Please help with the following, the options for each of the equestions are: Decreasae the ability to pay dividends Increase the ability to pay dividends Use the table to indicate how a firms ability to pay a dividend is affected by the facotrs described. Three such factors are described: Profitability ( an increase in net income), investment opportunities, and capita strucute ( and increase in the debt ratio.) Factors: Net income ? More profitable investment opportunites are availabe ? 'The firm increases its debt ratio ?Explanation / Answer
The Dividend Decision is a decision made by the directors of a company. It relates to the amount and timing of any cash payments made to the company's stockholders. The decision is an important one for the firm as it may influence its capital structure and stock price. In addition, the decision may determine the amount of taxation that stockholders pay.
There are three main factors that may influence a firm's dividend decision:
Dividend clienteles[edit source | editbeta]
A particular pattern of dividend payments may suit one type of stock holder more than another; this is sometimes called the clientele effect. A retiree may prefer to invest in a firm that provides a consistently high dividend yield, whereas a person with a high income from employment may prefer to avoid dividends due to their high marginal tax rate on income. If clienteles exist for particular patterns of dividend payments, a firm may be able to maximise its stock price and minimise its cost of capital by catering to a particular clientele. This model may help to explain the relatively consistent dividend policies followed by most listed companies.'
A key criticism of the idea of dividend clienteles is that investors do not need to rely upon the firm to provide the pattern of cash flows that they desire. An investor who would like to receive some cash from their investment always has the option of selling a portion of their holding. This argument is even more cogent in recent times, with the advent of very low-cost discount stockbrokers. It remains possible that there are taxation-based clienteles for certain types of dividend policies.
Information signalling[edit source | editbeta]
A model developed by Merton Miller and Kevin Rock in 1985 suggests that dividend announcements convey information to investors regarding the firm's future prospects. Many earlier studies had shown that stock prices tend to increase when an increase in dividends is announced and tend to decrease when a decrease or omission is announced. Miller and Rock pointed out that this is likely due to the information content of dividends.
When investors have incomplete information about the firm (perhaps due to opaque accounting practices) they will look for other information that may provide a clue as to the firm's future prospects. Managers have more information than investors about the firm, and such information may inform their dividend decisions. When managers lack confidence in the firm's ability to generate cash flows in the future they may keep dividends constant, or possibly even reduce the amount of dividends paid out. Conversely, managers that have access to information that indicates very good future prospects for the firm (e.g. a full order book) are more likely to increase dividends. According to Grullon (2002) the information value lies in the fact that a dividend increase signals a decrease in systematic risk (a decrease in discount rate), the correlation between dividend changes and earnings changes has not been proved.
Investors can use this knowledge about managers' behaviour to inform their decision to buy or sell the firm's stock, bidding the price up in the case of a positive dividend surprise, or selling it down when dividends do not meet expectations. This, in turn, may influence the dividend decision as managers know that stock holders closely watch dividend announcements looking for good or bad news. As managers tend to avoid sending a negative signal to the market about the future prospects of their firm, this also tends to lead to a dividend policy of a steady, gradually increasing payment.