Question

1. What are the advantages/disadvantages associated with the residual dividend policy? How to solve the dividend policy problems caused by the residual dividend model?

2. Discuss how corporate tax and individual income tax affect corporate dividend policy.

Answer 1

1. Advantages of Residual Dividend policy are as follows-

A. It would lead to decrease in the overall flotation cost of the company

B. It would also lead to decrease in the fresh issue of the share

Disadvantages-

A. It results in conflicting dividends

B. It is leading to increase in the risk and increase in variable dividend

Firm can solve the Dividend policy problem by ascertaining an uniform rate of dividend and decreasing the overall risk associated with it by by solving the conflicting dividend problem and facilitating better Dividend policy.

2. Corporate tax will be having an effect on the Dividend policy and when there will be a higher tax on dividend, it will mean that the individuals will be refraining from receiving dividend and in those scenario of the company should re-invest ithe profits into the business.