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Dividend Policy

Why would a firm want to incorporate a dividend policy? What effect does this policy have on shareholder's wealth? What factors should be considered when recommending changes to a company's dividend policy?

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1. Why would a firm want to incorporate a dividend policy?

A firm may want to incorporate a dividend policy when it begins to make a profit. This is when the firm must decide on what to do with those profits. They could do one of two things. The firm could decide to continue to keep the profits within the company, or the firm could pay out the profits to the owners of the firm in the form of dividends. It is when the company decides on to pay dividends that it may establish a somewhat permanent dividend policy, which may in turn impact on investors and perceptions of the company in the financial markets. What they decide depends on the situation of the company now and in the future. It also depends on the preferences of investors and potential investors. (http://www.studyfinance.com/lessons/dividends/)

Dividends are payments made to stockholders from a firm's earnings, whether those earnings were generated in the current period or in previous periods http://www.studyfinance.com/lessons/dividends/index.mv?page=01#dpsv).There are three types of dividend policies to consider: Constant Dollar Dividend Policy; Constant Payout Ratio and Regular with Extras (http://www.studyfinance.com/lessons/dividends/index.mv?page=02).

2. What effect does this policy have on shareholder's wealth?

Shareholders?wealth is represented in the market price of the company's common stock, which, in turn, is the function of the company's investment, financing and dividend decision (Horn, & ...

Solution Summary

This solution discusses why a firm would want to incorporate a dividend policy. It also examines the effect this policy has on shareholder's wealth, as well as what factors should be considered when recommending changes to a company's dividend policy. supplemented with an informative article on issues related to a dividend policy.

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