In one of my projects , he ask me : How could the firm pay dividen in the las fe
ID: 2806907 • Letter: I
Question
In one of my projects , he ask me : How could the firm pay dividen in the las few years ?Also , what I recommend to them ,how they should pay to their shareholders if they have exceeds cash?
How i could answer these two questions? On what basis? In one of my projects , he ask me : How could the firm pay dividen in the las few years ?
Also , what I recommend to them ,how they should pay to their shareholders if they have exceeds cash?
How i could answer these two questions? On what basis? How could the firm pay dividen in the las few years ?
Also , what I recommend to them ,how they should pay to their shareholders if they have exceeds cash?
How i could answer these two questions? On what basis?
Explanation / Answer
A firm can raise money in two ways i.e. debt and equity. Firm is supposed to repay debt and interest on time even if the firm undergoes financial losses is a particular year. Therefore payment of debt is a mandatory obligation. On the other hand it is totally upto discretion of firm to pay or not to pay dividends to it share holders (also known as equity holders).
1st Answer: If a firm is paying dividends over the last few years, it could be because the firm is able to generate stable and good amount of profits over the recent years. This signifies that the firm business is doing well and there were no business shocks to the firm so far. Paying dividends to the shareholders is one of the way through which management / board of directors give message to the market that the firm is indeed doing well. Also besides generating stable profit income, management does not foresee any profitable investment opportunity in near future. So rather than keeping retained earnings as equity base with themselves, firm prefers to distribute this retained earnings as dividends to its shareholders.
2nd Answer: Before paying dividends, management should think about long term strategy of company. Is there any need of internal funds for business expansion like setting up a new manufacturing unit, investing overseas etc? If management feels that they require internal funds in the form of retained earnings, promoter's contribution for future expansion plans then they should set up the dividend payout ratio to its shareholders accordingly. Secondly management should also consider the perception of their firm in market. If the normal perception about the firm is subdued despite the firm generating good revenues, management should consider paying dividends to its shareholder which would give positive signal to the outside investors in share market. Thirdly management should forecast the business of their firm in coming future. If management feels that there might be cash losses to their firm in coming future, then they should retain their earnings and reduce dividend payout ratio as a preventive measure to sustain their business in tough times ahead.
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