Dividend Payments Impact On Shareholders Wealth Finance Essay

Dividend Payments Impact On Sh beholders Wealth finance EssayDividendis a give of earnings made to shargonholders by an geological formation Its a make which is paid out to the community sh areholders. When a amplification is earned by the go with, the profits are used again to deco consider for a better appendage of the guild for its future, or it fundament in homogeneous manner be paid to the confederation grantholders in the form of dividends. Dividends are similarly paid to the stockholders in the form of coin or servings. The family moldiness stupefy comfortable monetary re extension in auberge to pay dividends to its shareholders. Dividends are princip tout ensembley paid out by a friendship lone(prenominal) when the ships club make good profit and its been paid form its meshwork.Dividend polity is of great interest n todays financial industries when the joint stock companies came into existences. Dividends can withal be defined as a distributio n of companys cabbage which is decided by the board of directors to a class of its shareholders, dividend is too quoted as a percentage of the stream market price. It is as well known as dividend per share (DPS). Dividend can also be in a form of bills, stock or property.The level of dividends also depends on the companys dividend policy. Many titanic companies down a progressive dividend policy. They are usually paid afterwards half year and full year financial results, even though few companies pay quarterly. on that point are various types of dividends which are as fol scummysCash Dividend first-string Cash Dividend, Special Cash Dividend, blood line Dividend Stock RepurchaseCash dividend When a company pays dividend in the form of bills is known as funds dividend, cash dividends are generally paid four ages a years to its shareholders. Such as Regular cash dividends and special cash dividends.THEORIES OF DIVIDEND POLICYDIVIDEND RELEVANCE THEORYDIVIDEND irrelevanc y THEORYDIVIDEND RELEVANCE THEORYThis was a opening proposed byMyron J. Gordon(1959)and sewer Linter(1956). Therefore, Dividendrelevance suppositionsuggests that investors are taking a risk generallyand would rather grantdividends today rather than share appreciation and dividends tomorrow. Myron J Gordon(1959) and John Lintner (1956) have also suggested that in the early sixties, investors see current dividends as less risky than future dividends and capital gainsDividend relevance theory also states that dividend policy accomplishments theshare price of a company. Therefore, an optimum dividend policy should be determined which will ensure the better riches of the shareholders. However some market participants state that there is some radio link between share price and the dividend policy of a company.DIVIDEND IRRELEVACE THEORY consort to Modigliani and Miller (1961) the dividend policy is irrelevant to the share price of the company. The value of the sign is determined by the earning capacity of a company and non by its dividend closing.Modigliani and Miller (1961) pointed out that the investors who are rational may make the pickaxe but maximise their utility, which are indifferent to receiving capital gains or dividend on their shares.The assumption of this theory states thatThere are no transaction monetary value on the buying and selling of the sharesInvestors are having sufficient knowledge intimately the companyTaxes are ignoredSame interest rate would be available to investorsAccording to the above assumption, the company which has good prospective with a positive NPV will have a good share price in the market.Dividend remuneration has concern on shareholders wealthinessArguments for and against of a cash dividend payout that would have an impact on the Market value of a companyArguments in favour of the impactSignalling numberIf a company pays dividend to its shareholders continuously, it conveys a put across to its investors showing the current offshoot of the company and its future prospectus. Since company pays dividends regularly to its investors, they do non have any agency problem. trade number There are two types of shareholders in the industry. One free radical who are accepting regular income as dividends for eg Pensioners. The other group are the ones who are non expecting dividends, because they are interested in the future issue of the company by increasing the capital gain.Arguments against the impactTax coreWhen shareholders receive income from dividends they have to pay tax which will see their earnings. If the company pay high dividends to the investors, it would bear on the earnings of the company. This would also reduce the cash f piteous of the company if it wants to make investments.EarningsThe market capitalization of the company depends upon the earning per share of the company and not on the dividend policy of the management.InvestmentIf the company pays all its earnings to the s hareholders as dividend, they would not have sufficient reserves for future projects. Therefore the growth of the company is an important decision than the decision of the dividend.LiquidityA company would not have any placid cash left if it pays all earnings and profits to its investors. So fluidness is the master(prenominal) factor in a company as it would affect the business.Arguments for and against, whether a cash dividend is paid or not is irrelevant in the context of shareholder wealth maximizationArguments favoring the impactThe Net profit value (NPV) of a company plays a major routine when dividends are given to its shareholders. Dividends would not necessarily be paid to its shareholders as destroying shareholders wealth in the real world is replaced with wise set of shares.Retained earningsIf the company pays all the income to its shareholders as dividend, then the company would not have sufficient retain earnings to make investment in the useful projects. If the co mpany necessarily any funds for the future, it would fasten on from sources like fairness or debt markets which will growing the be of the capital because the live of orthogonal funds are comparatively higher than the cost of internal funds.Arguments Against the impactInformation content If the company does not pay dividend regularly to its investors, shows a sign of negative signal to the capital market and hence the share price would also decrease in the market and would also affect the growth of the company.One of the major problems is the agency cost between the shareholder and the management. The shareholders generally expect a good growth of the company which would in turn give good dividend to the investors. But, the aim of the management is to grow the company in order to maximize the wealth and the power which may not be of interest to the shareholders.Arguments for and against weather dividend requitals should be avoided, as they would lead to a decrease in shareho lder wealth.Arguments favoring the impact of shareholders wealthIf the company does not pay dividends to its shareholders, the funds can be utilized for the future growth of the company. There would also be a dual benefit two to the company and the shareholder, where the shareholders may not need to pay an tax on dividend and for the company, they do not need to pay any transaction cost. There is also an argument to change the dividend policy from low to high payouts. insurance policy Formulation In a company there is an administrative cost that is involved with the dividend policy which would in turn reduce the earnings of the company. exist of capital When a dividend payment is reduced, the external financing plays an important role in reducing the cost of capital of the firm. Due to this reduction of cost of capital, the value of the firm has increased because there is an relationship between cost of capital and the value of the firm.Arguments against the impact of shareholders wealthIf a company avoids dividend payment to its investors, shareholders would withdraw their investment that they have invested in the company and thus this would also have an negative impact on the shareholders wealth.Signalling effect When a dividend payment is avoided there is an signalling effect which effects the growth of the company and will also have an impact on the share price and effect the shareholders wealth.FACTORS touching THE DIVIDEND POLICY OF A COMPANYStability of earnings Companies which have regular income formulate regular dividend policy than those companies having an uneven flow of income. This can be easily know by the earnings of the company.Liquidity of Cash The briny factor in the dividend decision of a company depends on the cash flow. The higher the funds the company earns is better for the company in order to pay high dividends to the investors. In order to pay dividends the company needs funds and therefore the availability of cash will be the main f actor of the dividend policy.Extent of shareholders A company makes decision against the shareholders for the suspension of the dividend to its investors. On the other hand, a company having lots of shareholders are distributed forming high and low income group. This would also have difficulties in securing the assets, because of higher dividend.Taxation Policy If a company pays high tax, not the earnings of the company would be touched but also the dividend would be decreased. Tax on dividends is waived by the presidential term only up to a certain limit. This would in turn effect the capital growth of the company. Reduction in tax dividends reduces the value of all the tax payers. The capital gain tax is also likely to be below the shareholders tax rate. Shareholders may also prefer gapital gains to dividends. film directors resolve the affair between the conflict of interest between the shareholders of a company.Past dividend evaluate When the company pays dividend to its sha reholders, it has to review the rate of dividend paid to the shareholders in the previous years, The dividend rate should be should be equal or more to the past dividend rate. readiness to Borrow Only large firms and well established firms can borrow funds from the capital market and other external sources. These companies should have a good payout ratio. And smaller firms who are not well established affirm on internal sources, and they would also have to build good reserves by reducing the payout ratio.Legal constraints There were some constraints in the payment of dividends make by the UK government in the year 1960. There was some control in the payment of dividend. As a government measure, to drown the anti inflation, but later in 1979, they removed these restrictions so the company must know the legal rules and the government policies before forming the dividend policy.Policy of encounter This is another main factor for the dividends. The control of the company is determine d by the ordinary shares of the company. If the company wants to make investment they need funds. These funds should be obtained from equity capital, If they raise the equity capital, the new shareholders will invest in the company so the directors of the company have full control where they would not want to add any new shareholders to the company, and would announce a low dividend rate to its existing shareholders. The directors do not want to add new shareholders because they would not have any control and diversion on the policies of the management. fourth dimension for Payment of Dividend Payment of dividends are planned in such a manner that there is no cash flow at the time of issuing dividends, as during the peak time of the company would require funds for urgent finances.Regularity and stability in Dividend Payment Companies maintain dividend leveling fund in order to pay regular dividends to its investors and also have a constant rate of dividends to most of its investors .Investment opportunity piece the board of directors make dividend policy decisions, they should consider if there is any fat project or not. If there is a project in which they have to invest, then they have to announce a lower dividend to its shareholders.Opportunity to intoxicate fundsThe management should think near if there is any source to collect the required funds if needed at a cheaper cost, if not they should not announce more dividends to the shareholders.Growth A growth of a company is one of the major factor and plays an important role when dividends are issued to its shareholders. Growth can be measured in sales, market share and the profit of a company.ConclusionDividend policy is concerned with level of dividends for the shareholders of a company. thereof from the above mentioned two theories, we can conclude the followingAs per the opinion of Director A, dividend should be provided to the shareholders for the following reasonsSignalling effect This conveys a me ssage to its investors showing the current growth of the company and its future prospectus.Clientele Effect If a company pays higher cash dividend to the shareholders, it gives more sign of chances about its future to its investors and the increase in dividends may lead directly to an increase in the companys share price in the market.As per the opinion of Director B, Dividend payment is irrelevant to shareholder maximization wealth for the following reasons.If the company pays all the income to its shareholders as dividend, then the company would not have sufficient retain earnings. If the company needs any funds for the future, it would borrow from sources like equity or debt markets which will increase the cost of the capitalAs per the opinion of the Director C, dividend payments should be avoided due to the following reasons.If the company does not pay dividends to its shareholders, the funds can be utilized for the future growth of the company. There would also be a dual benefi t two to the company and the shareholder, where the shareholders may not need to pay an tax on dividend and for the company, they do not need to pay any transaction cost.Thus we conclude based on the managements views of a company on dividend payments and the effect on firm value. Because the dividend policy is a natural consequence of dividend theory being applied, the conclusions to this are categorised under the dividend policies, such as the managed dividend policy, and also there is a consequence of the relevant dividend theory and the residual dividend policy, a consequence of the irrelevant dividend theory.