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Home » Finance Homework Help » Dividend Policy
Dividend Policy
The objective of this particular section of finance is to highlight the issues of dividend policy, critically evaluate why some experts feel that dividend policy matters and to discuss the bird in the hand argument for paying current dividends. It also explains the logic of the dividend irrelevance and identifies the market imperfections that make dividend policy relevant. It focuses on the importance of the stability of dividend and understands the factors of the stability of dividend. It also discusses the significance and implications of bonus shares and stock splits and the share buyback and explains the corporate behaviour of dividends.

Dividend decision of the firm is yet another crucial area of financial management. The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained in the firm. Retained earnings are the most significant internal sources of financing the growth of the firm. On the other hand, dividends may be considered desirable from shareholder’s point of view as they tend to increase their current return. Dividend, however, constitute the use of the firm’s funds. There are theoretical issues differ on the issue that whether dividends affect the value of a share or not. On the one hand we have the view that dividends are bad as they result into the payment of higher taxes (because of the difference in the ordinary income and capital gains tax rates), and thus, they reduce the shareholder’s wealth. We also have a moderate view, which asserts that because of the information value of the dividends, some dividends should be always paid to maintain the
value of the share.

Some of its important topics are:

1. agency costs
2. bonus shares limitations and paying dividends
3. capital structure factors
4. cash flow utility and arbitrage process
5. dividends-forms and merits
6. financial investment
7. miller's model (present value of interest tax shield)
8. relevance and elements of capital structure
9. the trade off theory (financial distress)

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