A 250-word paper that explains your response to the scenario Step 1: Scenario. A

Question

A 250-word paper that explains your response to the scenario

Step 1: Scenario. Assume your firm has never distributed cash to its shareholders. However, now you are trying to determine the appropriate way to distribute some cash that is consistent with maximizing shareholder wealth.

Write a 250-word paper using information presented in the scenario to help answer the following questions:

-Why would a dividend distribution be important?

-What type of dividend policy should you adopt? List at least two options.

-What factors impact the dividend policy decision?

-Would a stock split or a stock dividend suffice? Justify your answer.

Explanation / Answer

A dividend distribution is important because investors has provided capital to the firm for its working in the consideration that in future when firm grow and earn profits from its working then it will provide them return on investment(capital) that they had provided to the firm in past. " Dividends, those cash distributions that many companies pay out regularly to shareholders from earnings, send a clear, powerful message about future prospects and performance. A company's willingness and ability to pay steady dividends over time - and its power to increase them - provide good clues about its fundamentals.

Dividend Policy that i will adopt will be

Residual
Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met.

Stability

The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy.

Factors influencing dividend policy decisions are

External Restrictions:

The protective covenants in a bond indenture or loan agreement often include a restriction on the payment of cash dividends. This restriction is imposed to preserve the firm’s ability to service its debt.

These restrictions may be in the form of coverage ratio, sinking fund etc. Presence of these restrictions forces a company to retain earnings and follow a low payout.

Access to the Capital Market:

Another matter for consideration by management in setting an appropriate dividend policy is the company’s ability to obtain cash on relatively short notice. This may be achieved by the company negotiating for a bank overdraft limit or having access to other short-term sources of funds.

Managerial Control:

In some cases, control of the firm may be a factor to consider when establishing dividend policy. Suppose a fairly substantial proportion of the firm is owned by a controlling group, and the remainder of the stock is publicly held. Under these circumstances, the higher the payout ratio, the more likely that a subsequent issue of equity may be needed to finance capital expenditures.

Liquidity:

The liquidity position of a firm is often an important consideration in dividend decisions. Since dividends represent a cash outflow, it follows that the better the cash position and overall liquidity of the firm, the greater is the firm’s ability to pay (and maintain) a cash dividend.

Yes,companies chooses to split their common stock A common justification is to increase the marketability of securities. Usually a stock split occurs when the price of the stock is too high.

The logic is that stock splits allowing lower prices result in increased trading, because now many more investors can trade stocks. Increased trading results in higher volatility.

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