Dividend Policy

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Dividend policy is an important aspect of public listed company. The dividend is what shareholders earn as returns from investing in the company stock. A firm management is responsible for determining whether the firm will distribute dividends or not. Dividends may be paid either in cash or bonus stocks. In the case given the firm has never distributed cash to its shareholders. Distribution of dividend is important to the firm. Payment of dividends has an impact on the stock prices. This is because payment of dividends is an indicator of the financial well-being of the firm. The certainty of the good financial performance of business results in the increase in stock prices. The increase in stock prices results in achievement of shareholders wealth maximization goals. Those investors who are in need of a secure current income require a firm that pays dividends. This business as indicated in the scenario has no dividend history and is intending to pay dividends it will be viewed as a pleasant company to invest in. When a business is seen as favorable, then stock prices go up as demand for the company stock increases thereby maximizing shareholders wealth. Various dividend policies business can apply comprising of the stability system, residual or a hybrid of those two policies. The residual dividend policy is one in which the business uses internally generated funds to finance new investments. What remains after financing the new investment is used to pay dividends. Under the stability policy, a firm may set a certain fraction of the company’s earnings to be used to pay dividends. Under the hybrid policy, the company views debt/ equity ratio as being a long term goal.

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