FINANCIAL FACTORS AFFECTING DIVIDEND DECISIONS
The ability of a firm to raise money externally will have a direct bearing on the level of dividends paid to shareholders. Clearly, a company that has easy access to the capital markets, and that can conveniently and economically raise funds in a number of alternative ways, will have greater latitude in setting dividend policy than a firm that has to rely heavily on earnings retention as a source of financing.
In essence, the key question is whether or not a firm can (if the need arises) finance its dividend payments externally. Those that can are likely to set higher dividend levels than those that cannot.
Two aspects that tend to work against this approach to dividend payments are the cost of financing and issue expenses. Financing dividends externally may have merit so long as the cost of financing is relatively low.
However, when interest rates rise, the idea of financing dividends begins to lose its appeal. Moreover, issue expenses and other flotation costs will lower desired pay-out ratios, since they raise the cost of financing.
This is particularly true when the amount of external financing involved is fairly small, for flotation costs are inversely related to the size of the issue and tend to rise rapidly as the size of an issue declines.[7]
CONCLUSION
From the article, we can conclude that there are a lot of factors that affecting dividend decisions. First of all is the factor of profitability. Company will consider about the extent of profits in making a dividend decisions. In addition, the profitability is also influences the opportunities to the company for future investments. Other than that, the dividend rate is also the factor that affecting dividend decisions which i...
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... These alternatives have a negative impact on the payout ratio same goes to the risk and growth. This is because these variables increase dependency on external finance and the associated transaction costs. The determinant of the firm’s target payout ratio is shown by the percentage of share held by central and state governments. Last but not least, by using dividends ratio and repurchases ratio as dependent variables we can know about the determinants of the amount of corporate payouts. Retained earnings, profitability and the growth rate of total assets can give influences in the dividend amount payout. If the firm has the high amount of cash holding, they can pay dividend more. Other than that, firm size is the most important factors to determining the dividend payout because some of the firms distributed a substantial amount of cash through repurchases.[11]
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
...disclosing positive signal to the investor. In this case, the profitability, turnover and return to the investors are less and this is the industrial trend. In this situation, an investor has to look into the liquidity ratio and into the debt ratio. When the profit earning capacity of the company is lesser in the industry, those company should not prefer to have higher debt as this will drain their entire liquidity and will add more pressure to the company. This will increase the chances of bankruptcy and financial distress costs too. In this regard Exxon has very poor liquidity and higher debt which is adding more risk on investment. In this case, Chevron will be preferred over Exxon because, Chevron provides for similar return to investors but at lower risk, where as risk is higher in Exxon with lower return. Thus, Exxon should not be chosen for making investment.
The dividends record from the period 2001 to date is shown in the table below. The company has made quarterly payments based on the presentation of their annual financial reports to the shareholders. The price per share has been increasing on average which is an expected positive return for the shareholders.
This company has been performing well for many years and this this because of their good business model. Everything that was noticed on the income statement was the good performance of company. Their dividends have increased over time; this was due to increased profits. The earnings growth projections for the next four years have increased five percent.
A company’s dividend policy is a major driver behind investors’ willingness to buy into the company. When a company has a consistent dividend policy, investors are more likely to want to invest in a company. This is the case when considering Team Baldwin. The dividends that were paid out were $1.75, $2.75, and $4.00. Andrews’ dividends were $5.66, $0, and $2.08. Baldwin’s consistently increasing dividends were very attractive to shareholders which helped to boost stock price. The fluctuating and sometimes nonexistent dividends of Team Andrews was a contributing factor of why their stock price declined each
We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.
The consistent high spending of capital equipment is the first reason why one would recommend reducing the debt to equity ratio. A company with higher levels of debt is less flexible in being able to adjust to new market demands and conditions that require the company to make new products or respond to competition. Looking at the pecking order of financing, issuing new shares to fund capital investing is the last resort and a company that has high levels of debt, must move to the equity side to avoid the risk of bankruptcy. Defaulting on loans occur when increased costs or bad economic conditions lead the firm to have lower net income than the payments on loans. The risk of defaulting on loans and the direct and indirect cost related to defaulting lead firms to prefer lower levels of debt. The financial distress caused by additional leverage can lead to lower cash flows available to all investors, lower than if the firm was financed by equity only. Additionally, the high debt ratio that Du Pont incurred also led to them dropping from a AAA bond rating to a AA bond Rating. Although the likelihood of not being able to acquire loans would be minimal, there are increased interest costs with having a lower bond rating. The lower bond rating signals to investors that the firm is more likely to default than if it had a higher (AAA) bond rating.
There is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than external financing which is due to adverse selection, asymmetry of information, and agency costs (Frank & Goyal, 2003). The trade-off theory comes from the pecking order theory it is an unintentional outcome of companies following the pecking-order theory. This explains that firms strive to achieve an optimal capital structure by using a mixture debt and equity known to act as an advantage leverage. Modigliani and Miller (1958) showed that the decisions firms make when choosing between debt and equity financing has no material effects on the value of the firm or on the cost or availability of capital. They assumed perfect and frictionless capital markets, in which financial innovation would quickly extinguish any deviation from their predicted equilibrium.
In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions.
shares, thereby reducing the dividend pay-out to shareholders. 2. What is the difference between a'smart' and a Another director argued that with equity financing, the company could be able to do shareholders will yield a 10% EBIT of $5M.
Introduction Dividends are the distribution of profits in the company. It depends on the type of dividend policy that is being made by companies. Dividend policy will affect the behaviours and attitudes of investors towards the company. Many economists and financial experts have constructed different theories to interpret the effects of a dividend policy on the society. But these theories are contestable since they are not tested in the real world.
...efit is shared by a larger group of equity investors. The company is still subject to similar level of risk compared to immediate repurchase based on credit rating determinants. Most importantly, initial abundant cash with promising investment projects will lead to even more lackluster non-core investment performance.
It was the conclusion of the author that financial ratios when combined with statistical analysis still remain a valuable tool. The theoretical conclusion was that ratios used within a multivariate framework take on a more influential role than when used in isolation. The discriminate model was very accurate in the initial sample of 66 firms, correctly predicting 94 percent of the original bankrupt firms. The potential suggested used of the model included: business credit evaluation, investment guidelines and internal control procedures. The MDA model also showed potential to ease some problems in the selection of securities of a portfolio but further investigation was recommended.
Most of preference share issued by company are cumulative preference share, which means that all the arrear of dividend must be paid to preference share holder before paying any dividend to equity shareholders. This is company liabilities to pay arrear of dividend which increase financial burden of company.
The ratios returns on investment (ROI) and return on equity (ROE) are two of the most popular measure of profitability of a company and, along with the P/E ratio, have the most significant value of any of the ratios. The DuPont Model expands on the ROI calculation by inserting sales and it's relationship to the companies' generation of profits and utilization of assets into the calculation. Additional profitability ratios include the price earnings ratio (P/E), the dividend payout and the dividend yield. The price earnings ratio helps to indicate to investor how expensive the shares of common stock of a firm are. Dividend yield is part of the stockholders ROI and is represented by the annual cash dividend. Dividend yields have historically been between 3% to 6% for common stock and 5% to 8% for preferred stock. Dividend payout ratio shows the proportion of the earnings paid to common shareholders. Dividend payout for manufacturing companies range from 30% to 50%, but can vary widely.