Dividend Policy Assignment Help
WHAT IS DIVIDEND POLICYDividend policy is the collection of guidelines a business uses to judge how much of its profits it will pay out to shareholders. Some indication suggests that investors are not affected by industry's dividend policy as they can sell a part of their collection of equities if they want liquid money. This testimony is described as the dividend irrelevance theory, and it necessarily intimates that an issuance of dividends should have limited to no influence on stock price. That being said, many businesses do pay dividends. Dividend policy is involved with financial procedures regarding paying a cash dividend in the immediate or paying an enhanced dividend at a later stage. Whether to issue dividends and what value is defined mainly by the company's excess cash and determined by the corporation's long-term gaining control. When cash excess exists and is not required by the firm, then the administration is expected to pay out some or all of those surplus profits in the form of cash dividends or to purchase the company's stock again through a share buyback plan. Management must also decide the form factor of the dividend administration, usually by cash dividends or share buyback. Several circumstances may be taken into attention: where shareholders should pay tax on dividends, businesses may choose to hold earnings or to implement a capital buyback, in both instances increasing the price of shares outstanding. On the other hand, some corporations will pay dividends from inventories than pay liquid cash. The financial theory proposes that the dividend policy should be established based on the kind of company and what authority decides the best use of the remaining dividend stocks for the marketing entity to its shareholders. As a general law, shareholders of extension organizations would prefer administrators to have a share buyback plan, whereas shareholders of value or following stocks would favor the management of these businesses to payout surplus profits in the form of cash dividends. Dividend policy is daring for the directors and business administrator of an organization because different investors have mixed views on immediate cash dividends and future capital gains. Another distraction that pops up is concerning the extent of the impact of dividends on the share value. Due to this dubious nature of a dividend policy, it is often described as the dividend puzzle. Several forms have been developed to help business entities interpret and evaluate the comprehensive dividend policy. There is no contract between these schools of thought over the relationship between dividends and the price of the share or the property of the shareholders in other words.
IMPORTANCE OF DIVIDEND POLICYAt first instance Dividend policy is known as the heavy factor at a firm’s stock price. Still, many scholars suggested that financial dividend policies don't matter. Many arguments were started against the dividend policies that the fact the investors created their dividends in an account to that of other investment options. A wise individual investor may take an interest in more stable bonds which will give better investments in return than a dividend policy which tends fluctuate over time. The second thing is that earning legal dividends is taxed at much higher value than that of the capital gains. This small reason did not have a chance to lure down the investors for the relative corporate dividend policies for the organizations as an exact price value for their stock. Some companies consider that a no-dividend policy is just as sound as businesses with a dividend policy. Companies without a dividend policy or plan can use their earnings to reinvest and develop the business shares or buy assets and other commodities. Having a dividend policy foregoes these possibilities. People who give the value earnings result of a company, a stable dividend policy is significant. It comprehends that a high and regular corporate dividend policy indicates that companies have a benchmark for performing so well. Hence, more dividends can relate to the overall health of the organization. Dividend policies are more important to small companies or organizations with surplus cash and a few excellent projects where the net present value or NPV of these plans are positive. Meanwhile, companies, without surplus cash but have many good projects where NPV is also confident will only hinder the execution of current and new projects. While a good business related dividend policy is equated to excess or surplus cash, the value of the business is not connected with some dividends as there are other indicators of the company's performance. There are various sorts of dividend policies. First is the residual dividend policy which is a type of process helps in the distribution of dividends those are required for the payment of all other requirements for capital yet to be met. Hence, dividends are calculated from the remaining cash after spending on new equipment required for the company itself. The purpose of this kind of dividend policy is to determine if there is sufficient money left after all costs are engaged. The other type of dividend policy is called as the cyclical dividend policy it is a regular and stable kind of policy which needs to be regulated on a quarterly basis. This policy is mainly constituted of a set of fractional yearly earnings, and this helps in providing the exact information towards the investors that they get every income generated from their investments. The value of the dividend policies falls under the decision of the investors. There are some contrasting reviews of its proper utilizations, one of an essential factor is in the achieving of the best bang for buck method.
DIFFERENT TYPES OF DIVIDENDSThere are various kinds or types of dividends which are generally paid out to the shareholders of a company; they are as follows:-
- Bonus Share - Sometimes companies are unable to fund dividend in money due to a shortage of liquid reserves. Then cash is the best way of earning a large sum of profit for a particular period. Under the conditions, the company issues new shares to the existing shareholders rather than paying off the dividend in cash. These types of shares are recognized as Bonus Shares. Such bonus shares are to be presented to the current shareholders in relationship to the shareholdings and dividend rights of a company.
- Share Purchase - A kind of security that provides the holder the benefit, but not the responsibility, to purchase a predestined number of shares at a decided price. This is similar to a stock right or warrant. These rights are typically allocated to existing shareholders of a respective company, who have the capability to sell these rights on an exchange.
- Scrip Dividend - A script is one of the various names but is originally known as a document approving debt. Companies who become low on cash usually pay scrip dividends rather than paying off cash dividends. A scrip is also a brief document or report describing partial shares emerging from a spinoff or split. Scrip Dividend can also symbolize currency assigned by a private company, such as recurrent investment miles.
- Liquidating Dividend - A kind of payment made by a company to its shareholders during its incomplete or full liquidation. Most components, such as partition is made from the company's capital center, and as a replacement of capital is typically not payable for shareholders. This separates a regular dividend from liquidating dividends, which are assigned from the company's managing profits or retained profits. In other terms, it is also known as Liquidating Distribution.
- Property Dividend - A property dividend can either constitute shares of a subsidiary corporation or physical assets or commodities such as inventories that the entity holds. The dividend is registered at the market value of the goods and services provided.
- Cash Dividend - A cash dividend is a type of money given to stockholders of a company, commonly out of the company's prevailing profits or accrued profits. The board of directors must submit all dividends, and they are taxable as wages to the beneficiaries. Long-term investors who want to increase their profits should think to reinvest their dividends. Most agents offer a choice to reinvest or taken as cash dividends.
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