Pretend you are the CFO of a company that has paid a steady dividend for the pas

Question

Pretend you are the CFO of a company that has paid a steady dividend for the past forty years and your recently hired, brilliant, freshly minted UTA Finance graduate who managed to pass Advanced Business Financial Analysis sends you a text message on your mobile phone while you are in the middle of yoga class that reads: Dividends are irrelevant. Why don’t we quit paying them? On your way home from class and experiencing inner peace, you decide to prepare a response to your newest colleague, who many not know much about your company, but is well versed in theory. How would you reply?

Explanation / Answer

DIvidend's are not irrelevant as:

1.) Resolution of investor's uncertainity: When a company follows a policy of stable dividend's it will change the amount of dividend's if there are temporary changes in the earnings of a company fail and it continues to pay same amount of dividend's as in the past, it conveys to the investor's future of the company is bright.

2. Investor's desire for the current income : the investor's who desire (Old and retired person's, women who are home maker's and childeren e.t.c.) to recieve a regular dividend income, will prefer a company a company with stable dividend's Rather than company with fluctauting or no dividends.

3.) Institutional investor's prefer company who pay stable dividend rather than company who pay fluctauting or no dividend.

4.) Loyalty of shareholder's as well goodwill of the company also increases.

Although, they may see irrelevant but these benefit's which described above are not going to come if we don't pay investor's.

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