Question

Read the scenario.

Assume your firm has never distributed cash to its shareholders. However, now you are trying to determine the appropriate way to distribute some cash that is consistent with maximizing shareholder wealth.

Step 2

Using the information presented in the scenario answer the following questions:

Why would a dividend distribution be important?

What type of dividend policy should you adopt? List at least two options.

What factors impact the dividend policy decision?

Would a stock split or a stock dividend suffice? Justify your answer.

Answer 1

Dividend represents return on investment and is useful in satisfying investor expectations as well as increasing their confidence in the firm.

I may adopt either a regular dividend policy where a regular rate of dividend is given out to the investors or irregular dividend policy where the amount paid is adhoc. I would adopt a regular dividend policy to boost shareholder wealth.

Some factors which affect dividend policy are:

Type of industry , ownership structure, shareholder expectations, stability of earnings.

A stock split of dividend cannot be a regular feature. It may suffice just once but cannot be done year after year. Thereafter the investors require cash dividends.