Question

1. If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividend yield and the capital gains yield be influenced by the firm’s decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain.  

Answer 1

At the end of every year the company has a choice of offering dividends to its shareholders or reinvest that amount into company's future projects. The shareholder has 2 earning options, a) dividends offered by the company or b) capital gains on the stock price. Some companies give dividends regularly to shareholders and some simply refuse the idea of dividends as the money reinvested it into the company which in turn result in more capital gains than what the shareholders might have earned olny through dividends. It is completely the company's discretion whether to pay dividends or not depending on what are the future plans.