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three theories of Dividends

BADM 621

You are a controller or a CFO of DuPont Corporation and you have two major decision:

1. You determine the capital structure of your company; therefore you must compare the two theories of capital structure and determine what mix of capital structure your company.

2. Your second decision the recession has hit your company "hard" and limited the company's cash. The company has long standing policy of paying cash dividends. You must discuss the pro and con of dividends and to some other form of payout plan. Also discuss the three theories of Dividends: Irrelevance theory, Bird in the hand theory, and tax preference theory.

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1. You determine the capital structure of your company; therefore you must compare the two theories of capital structure and determine what mix of capital structure your company.

One theory of capital structure is that companies have an optimal capital structure is based on a trade-off between the benefit and costs of using debt. From this perspective, the benefits of using debt are that the management does not lose control of the company, and in addition, the company can deduct interest from income before taxes. It saves taxes. On the other hand there is a financial risk in going in for debt.

The second theory that CFO of DuPont Corporation must consider is the pecking order theory that suggest that companies follow a hierarchical pattern in which internal funds are preferred to external funds, and borrowing is preferred to issuing risky securities.

According ...

Solution Summary

This explanation provides you a comprehensive argument relating to three theories of Dividends

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