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You are on Board of Directors of a major publicly traded company that has never declared...

You are on Board of Directors of a major publicly traded company that has never declared or paid dividends to its shareholders. The Board has been asked to vote on increasing borrowing in order to pay dividends.

Evaluate this strategy- Will you vote for or against it? Making sure to substantiate your recommendation.

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Answer #1

*Any doubt please comment

The idea of borrowing to finance dividends is a sustainable financial plan and must be voted against for. The company has never paid dividends and hence financing dividends will cause financial stress to the firm. Also, once dividends are declared the investors will anticipate the company to maintain the dividend payment level year on year and if the company does not have enough cash flows in the future years it will have to resort to more borrowings. This in turn will push up the overall cost of maintaining the capital.

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