Dividend Policy Flashcards
Main advantage of internal finance?
It is immediately available and obtained with no issue costs
Main disadvantage of internal finance?
Cash may have ben paid out as a dividend and this represents isue of equity
What if a company can finance its investments by borrowing?
It can finance dividends as long as it has accumulated net realised profits
What if a company is going through a growth phase?
Unlikely to have sufficient liquidity to pay dividends due to need to invest in non-current assets
Shareholder expectation in investment decision?
For dividends to remain low or zero
What happens when failure to meet shareholder expectations
Dividend price falls
What if dividend is not at level expected by shareholders?
This creates an unexpected signal that something is wrong
What is it generally better for a company to do?
Follow a consistent dividend policy
How can dividend declared be interpreted as?
A signal from directors to shareholders about the strength of underlying project cash flows
What is a constant payout ratio?
Payment at a constant % of profit
What is stable growth policy?
Dividends are increased at a level directors think is sustainable
What is residual policy?
Dividend is paid only if all +NPV prohects have been funded
When is residual policy usually done
When companies have difficulty raising debt finance
Benefits of a residual policy
Investments often have high returns. Good for young companies
When if a company is more likely to use debt finance
It is a mature company and likely to use stable growth or consistent payout policy
