Question

What are some advantages and disadvantages of optimal dividend policy from the investor and the firm’s perspective?

Answer 1

Answer: Optimum dividend policy- This is a type of dividend policy that keeps a balance between current dividends and future growth that helps maximize share price of company. In optimum dividend policy, companies decide the payout ratio that is based on "giving preferences to dividends over capital gains".

Advantage for investors- This increases confidence of investors in the company's policies. It provides regular income in the form of dividend and best policy for dividend seeker investors.

Disadvantage for investors- Investors do not get a fixed amount of dividend, it varies based based on profits.

Advantage for firm- This policy increases firm's value.

Disadvantage for firm- Company has different types of shareholders with specific preferences so it is not easy to make an optimum dividend policy.