Explore BrainMass

Explore BrainMass

    Residual Dividend Policy and Borrowing Money to Pay Dividends

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    A) Discuss the pros and cons of having the directors' formally announce what a firm's dividend policy will be in the future.

    B) Would it ever be rational for a firm to borrow money in order to pay dividends? Why or why not?

    C) One position expressed in the financial literature is that firms set their dividends as a residual after using income to support new investments.
    i. Explain what a residual dividend policy implies, illustrating your answer with a table showing how different investment opportunities could lead to different dividend payout ratios.
    ii. Where we considered the relationship between capital structure and the cost of capital. If the WACC-versus-debt-ratio plot were shaped like a sharp V, would this have a different implication for the importance of setting dividends according to the residual policy than if the plot were shaped like a shallow bowl (or a flattened U)?

    © BrainMass Inc. brainmass.com December 15, 2020, 9:36 pm ad1c9bdddf

    Solution Preview


    Kindly find attached a tutorial having some ideas, references and content ...

    Solution Summary

    This solution helps with a problem regarding residual dividend policy and borrowing money to pay dividends.