Question

What was the dividend payout ratio? If you are shareholder of this company, how would it affect you if company does not pay any dividend? If managers of the company want to influence the stock price by paying higher dividend, can they do so? If managers of this company do not pay dividend in any year, what could be the possible reasons? Support your viewpoint with relevant theoretical foundations.

Answer 1

Dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.

dividend payout ratio = Dividend/ Net Income

Shareholders are interested in the maximisation of their wealth. This takes place when return of the shareholders are maximised. These returns are made up of capital gains in the form of increases in the share prices, as well as dividends, which are made possible when the company generates adequate distributable profits.shareholders’ wealth is represented in the market price of the company‘s common stock, which, in turn, is a function of the company’s investment, financing and dividend decisions.The optimal dividend policy is one that maximises the company’s stock price. So as a shareholder we look forward to payment of dividends and if no dividends are paid on the stock shareholder might lose confidence in the investment unless capital gains on investment is higher compensationg shareholder for no payment of dividend.

Yes, managers of the company can influence share price by providing higher dividend. Dividend yield is positively related to the stock price. More the dividends highers is the stock price. Since dividend policy is determined by the management of the company so managers can influence stock price by paying higher dividends.

If the company is under financial strain for more than a year then management might not pay dividend in any year. This is because dividends are paid out of company's retained earnings so the mangement might suspend dividend in case of financial strain to safeguard its financial reserves for future expenses.