The board is meeting to decide whether or not to declare a dividend to the share
ID: 373520 • Letter: T
Question
The board is meeting to decide whether or not to declare a dividend to the shareholders. What is the rule the board must follow to make this decision? What factors (specific facts, not some generic statements) must you look at to decide whether or not to declare a dividend and how much that dividend amount might be? Explain fully. (10 points)
When the board meets to decide the declaration of dividend to the shareholders it should keep certain things in mind. Firstly, they should make sure that they retain enough liquidity to meet their financial obligations. It is a good way to win investor confidence by giving them back excess cash but if the financial obligations are not provided for then the company will suffer.
When the accountant recommends the dividend to the board of directors they go through the financial statement and then consider whether the dividend should be paid or not.
Another thing to remember is that dividends are not paid out of capital it has to be paid out of retained earnings. This means after accounting for investment for future growth, paying off debts, taxes and so on.
The corporation should understand that they are in the first year of their business and they should not be hasty about declaring dividend. It is an encouraging thing when the company declares a dividend as it gives the idea that there has been a profit and the company wants to share it but on the flip side it also might throw light on the fact that if there is surplus money why is it not being invested as the company is so young they would definitely need money. If it is not investing, then does it mean that the market has stagnated and it will not grow. Hence, since it is just the first year it would make sense to not declare a dividend.
The board is also meeting to decide whether or not to give you a raise. May you participate in that decision? Why or why not? Explain. (5 points)
When the board is making a decision to giving the CEO a raise he cannot participate in that decision. The reason being he is to be paid for the job that he is doing and the board decides if he is doing a good job or not and then they can decide whether the CEO warrants a raise or not.
What specific factors (again no generic statements) must the board look at to decide whether to give you a raise – some of the same factors used in (a) will apply, but there are some additional factors to look at and consider. (10 points)
When the salary raise of the CEO is to be considered one needs to keep in mind the fact that the CEO gets a higher package which is way more than the average worker. So if it means that the CEO needs to be paid less so that the company has enough liquidity to meet their financial obligation so be it.
Off late the trend is to see the salary and raises given to other CEO’s and then decide what needs to be paid to our CEO. This might not be a very good way to give a raise as several factors have to be considered like the size of the company. The kind of business the corporation is in and the future path of the corporation. These could be factors which separate the corporations and thus become the differing factors for the CEO’s as well.
When deciding the raise of the CEO one must see the present situation for the corporation and compare it to when the CEO joined. In this case the business has been running for a year. If the CEO is to be given a raise or not, it should be decided by comparing it with the competitors and where they are and what is the company’s standing in comparison to the competitors. If the company is not doing too well the CEO gets nothing. If the performance is average, then too no raise. In case the company made super normal profit then the CEO should reap the benefits too.
One has to look at the company’s situation and then decide regarding the raise to the CEO.
Explanation / Answer
You and three of your friends have started a closely held corporation (this means that the stock is NOT publically traded, and never will be). The corporation after its first year in business after paying all of its bills has made a profit of 100,000.
You and your friends are the four shareholders, all of you are also on the board of directors and each of you is an officer in the corporation – you are the CEO.
The board is meeting to decide whether or not to declare a dividend to the shareholders. What is the rule the board must follow to make this decision? What factors (specific facts, not some generic statements) must you look at to decide whether or not to declare a dividend and how much that dividend amount might be? Explain fully. (10 points)
The board is also meeting to decide whether or not to give you a raise. May you participate in that decision? Why or why not? Explain. (5 points)
What specific factors (again no generic statements) must the board look at to decide whether to give you a raise – some of the same factors used in (a) will apply, but there are some additional factors to look at and consider. (10 points)
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