7. Dividend Policy

Question 1

What do M&M say about dividend policy?

Answer 1

The pattern of dividend payment is irrelevant so long as positive NPV projects are taken on.
Once a firm has invested in all positive NPV projects should a dividend be pad.

Question 2

Dividend Signalling

Answer 2

Firms should attempt to adopt a stable dividend pay-out to maintain investors’ confidence - known as ‘dividend signalling’

Question 3

what order are equity funds used in?

Answer 3

1. Retained Earnings - cheapest source of finance as there are no issue costs. But could result in cuts in dividends.
2. Rights issue - relatively low issue costs
3. New issues