Question

Explain the likely effects on dividend-payout ratios of each of the followings. a) Interest rates increase...

Explain the likely effects on dividend-payout ratios of each of the followings.

a) Interest rates increase substantially;

b) Company profitability increases;

c) Prospectus requirements are tightened, increasing the cost of share issue;

d) Personal income (but not capital gains) tax are increased;

Homework Answers

Answer #1

A) When the interest rates are increasing substantially, it will mean that there will be low profit and dividend is likely to be maintained whereas DIVIDEND PAYOUT RATIO WILL INCREASE because of increase in interest rates.

B) When profitability of the company will be increasing, dividend are likely to increase but the rate of increasing is lower than the rate of increase in profits so DIVIDEND PAYOUT RATIO WILL DECREASE.

C) When prospectus requirement are tightened then there will be increase of cost of share issue and it would be leading to higher cost of raising capital which will make retention of profit more attractive and hence DIVIDEND PAYOUT RATIO IS EXPECTED TO DECREASE.

D) When personal income tax are increased, there will be decrease in demand for dividend and there will be need to pay more tax and hence DIVIDEND PAYOUT RATIO WILL DECREASE.

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