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Dividend Payments Impact On Shareholders Wealth Funding Essay

Dividend is a kind of payment made to shareholders by a business; It's a income which is paid out to the business shareholders. When a profit is earned by the company, the profits are being used again to invest for an improved growth of the business because of its future, or it can be paid to the company shareholders by means of dividends. Dividends are also paid to the shareholders in the form of cash or shares. The company must have sufficient funds to be able to pay dividends to its shareholders. Dividends are usually paid out by the company only once the company make good income and it's been paid form its cash flow.

Dividend insurance plan is of great interest n today's financial market sectors when the joint stock companies arrived to existences. Dividends may also be defined as "a circulation of company's cash flow which is decided by the table of directors to a school of its shareholders, dividend is also quoted as a share of the existing market price. Additionally it is known as dividend per talk about (DPS). Dividend may also be in a kind of cash, stock or property.

The level of dividends also depends on the business's dividend insurance plan. Many large companies have a intensifying dividend policy. They are usually paid after half season and full 12 months financial results, even while some companies pay quarterly.

There are various types of dividends that are as follows:

Cash Dividend

Regular Cash Dividend, Special Cash Dividend, Stock Dividend & Stock Repurchase

Cash dividend: When a company pays off dividend in the form of cash is known as cash dividend, cash dividends are generally paid four times a years to its shareholders. Such as Regular cash dividends and special cash dividends.

THEORIES OF DIVIDEND Insurance plan:

DIVIDEND RELEVANCE THEORY

DIVIDEND IRRELEVANCE THEORY

DIVIDEND RELEVANCE THEORY:

This was a theory suggested by Myron J. Gordon(1959) and John Linter(1956). Therefore, Dividend relevance theory shows that investors are taking a risk generally and would rather have dividends today somewhat than share appreciation and dividends tomorrow. Myron J Gordon(1959) and John Lintner (1956) also have suggested that "in the first sixties, shareholders see current dividends as less risky than future dividends and capital gains''

Dividend relevance theory also expresses that dividend insurance policy effects the talk about price of your company. Therefore, an best dividend insurance policy should be established that will ensure the better riches of the shareholders. However some market members state that you can find some interconnection between talk about price and the dividend plan of an company.

DIVIDEND IRRELEVACE THEORY:

According to Modigliani and Miller (1961) the dividend plan is irrelevant to the show price of the business. The value of the firm depends upon the generating capacity of your company and not by its dividend decision.

Modigliani and Miller (1961) pointed out that "the shareholders who are logical may make the choice but maximise their energy, which can be indifferent to obtaining capital gains or dividend on their stocks''.

The assumption of this theory expresses that:

There are no purchase cost on the investing of the shares

Investors are having sufficient understanding of the company

Taxes are ignored

Same interest rate would be available to investors

According to the above assumption, the company which has good potential with an optimistic NPV will have a good talk about price in the market.

Dividend repayment has effect on shareholders prosperity:

Arguments for and against of an cash dividend payout that could have an impact available on the market value of an company:

Arguments in favour of the impact:

Signalling effect:

If an organization compensates dividend to its shareholders regularly, it conveys a message to its shareholders showing the existing growth of the company and its future prospectus. Since company pays off dividends regularly to its shareholders, they don't have any agency problem.

Clientele Result: A couple of two types of shareholders on the market. One group who are agreeing to regular income as dividends for eg: Pensioners. The other group are the ones who are not expecting dividends, because they're interested in the near future growth of the company by increasing the administrative centre gain.

Arguments up against the impact:

Tax effect:

When shareholders receive income from dividends they have to pay tax which will affect their cash flow. If the company pay high dividends to the traders, it would have an effect on the wages of the company. This might also decrease the cash flow of the company if it wants to make investments.

Earnings:

The market capitalization of the business depends after the earning per share of the company and not on the dividend policy of the management.

Investment:

If the company pays all its earnings to the shareholders as dividend, they would not have sufficient reserves for future projects. Therefore the development of the business can be an important decision than your choice of the dividend.

Liquidity:

A company wouldn't normally have any liquid cash still left if it compensates all profits and profits to its investors. So liquidity is the key factor in a business as it could affect the business enterprise.

Arguments for and against, whether a cash dividend is paid or not is irrelevant in the framework of shareholder prosperity maximization

Arguments favoring the impact:

The Net profit value (NPV) of any company plays a major role when dividends receive to its shareholders. Dividends wouldn't normally automatically be paid to its shareholders as destroying shareholders riches in the real world is substituted with new set of shares.

Retained profits:

If the company compensates all the income to its shareholders as dividend, then your company would not have sufficient retain cash flow to make investment in the profitable assignments. If the business needs any cash for the future, it would borrow from sources like equity or debt markets which will boost the cost of the administrative centre because the price of external money are comparatively greater than the expense of internal funds.

Arguments Up against the impact:

Information content: If the business will not pay dividend regularly to its traders, shows an indicator of negative signal to the administrative centre market and hence the share price would also reduction in the market and would also impact the progress of the company.

One of the major problems is the organization cost between your shareholder and the management. The shareholders generally expect a good expansion of the business which would subsequently give good dividend to the investors. But, the aim of the management is to expand the company in order to maximize the wealth and the power which might not exactly be of interest to the shareholders.

Arguments for and against weather dividend payments should be averted, as they would lead to a decrease in shareholder wealth.

Arguments favoring the impact of shareholders riches:

If the company will not pay dividends to its shareholders, the cash can be utilized for future years growth of the business. There would also be considered a dual benefit both to the business and the shareholder, where the shareholders may well not need to pay an taxes on dividend as well as for the company, they do not need to pay any transfer cost. There is also an argument to change the dividend policy from low to high payouts.

Policy Formulation: In a company there is an administrative cost that is involved with the dividend plan which would in turn reduce the revenue of the company.

Cost of capital: When a dividend repayment is reduced, the external financing takes on an important role in minimizing the cost of capital of the firm. Due to this reduced amount of cost of capital, the worthiness of the firm has increased because there is an marriage between cost of capital and the worthiness of the company.

Arguments against the impact of shareholders wealth:

If a company avoids dividend payment to its investors, shareholders would withdraw their investment that they have invested in the business and thus this would also have an negative impact on the shareholders wealth.

Signalling result: When a dividend payment is averted there is an signalling impact which results the development of the business and will likewise have a direct effect on the share price and impact the shareholders prosperity.

FACTORS AFFECTING THE DIVIDEND Insurance plan OF A COMPANY:

Stability of cash flow: Companies that have regular income formulate regular dividend insurance plan than those companies having an uneven move of income. This can be easily know by the wages of the company.

Liquidity of Cash: The main factor in the dividend decision of a company depends on the cash stream. The higher the funds the company earns is better for the company in order to pay high dividends to the traders. To be able to pay dividends the company needs funds and then the option of cash will be the primary factor of the dividend coverage.

Extent of shareholders: A firm makes decision contrary to the shareholders for the suspension of the dividend to its shareholders. Alternatively, a corporation having plenty of shareholders are sent out developing high and low income group. This might also have challenges in securing the assets, because of higher dividend.

Taxation Insurance plan: When a company compensates high duty, not the wages of the company would be influenced but also the dividend would be lowered. Taxes on dividends is waived by the government only up to a certain limit. This might in turn result the capital growth of the business. Reduction in tax dividends reduces the worthiness of all tax payers. The capital gain tax is also apt to be below the shareholders tax rate. Shareholders could also prefer gapital benefits to dividends. Directors fix the conflict between the conflict of interest between the shareholders of an company.

Past dividend rates: When the company compensates dividend to its shareholders, it must review the rate of dividend paid to the shareholders in the last years, The dividend rate should be should be equal or more to days gone by dividend rate.

Ability to Borrow: Only large businesses and well established firms can borrow funds from the administrative centre market and other exterior sources. These companies must have a good payout ratio. And smaller companies who are not well established rely on inner sources, plus they would also need to build good reserves by reducing the payout proportion.

Legal constraints: There were some constraints in the repayment of dividends make by the united kingdom government in the entire year 1960. There was some control in the payment of dividend. To be a government solution, to defeat the anti inflation, but later in 1979, they removed these limitations therefore the company got to know the legal rules and the federal government policies before developing the dividend plan.

Policy of Control: This is another main factor for the dividends. The control of the business is determined by the ordinary shares of the company. If the company would like to make investment they want funds. These cash should be from equity capital, If they raise the collateral capital, the new shareholders will spend money on the company therefore the directors of the business have full control where they would not want to add any new shareholders to the company, and would announce a low dividend rate to its existing shareholders. The directors do not need to include new shareholders because they might not have any control and diversion on the guidelines of the management.

Time for Repayment of Dividend: Payment of dividends are planned in such a manner that there surely is no cashflow during issuing dividends, as during the peak time of the company would require money for urgent budget.

Regularity and stableness in Dividend Repayment: Companies maintain dividend equalization fund in order to pay regular dividends to its buyers and possess a regular rate of dividends to most of its shareholders.

Investment opportunity: While the plank of directors make dividend insurance policy decisions, they should think about when there is any profitable job or not. When there is a project in which they need to invest, then they have to announce less dividend to its shareholders.

Opportunity to collect funds:

The management should think about when there is any source to gather the required funds if needed at a cheaper cost, if not they shouldn't declare more dividends to the shareholders.

Growth: A rise of your company is one of the major factor and takes on an important role when dividends are granted to its shareholders. Expansion can be measured in sales, market show and the income of any company.

Conclusion:

Dividend policy is concerned with level of dividends for the shareholders of an company. Thus from all these two theories, we can conclude the next:

As per the opinion of Director A, dividend should be provided to the shareholders for the following reasons:

Signalling impact: This conveys a note to its shareholders showing the current growth of the business and its own future prospectus.

Clientele Result: In case a company will pay higher cash dividend to the shareholders, it offers more sign of chances about its future to its shareholders and the upsurge in dividends may lead directly to an increase in the company's share price in the market.

As per the opinion of Director B, Dividend repayment is irrelevant to shareholder maximization riches for the next reasons.

If the business pays all the income to its shareholders as dividend, then your company wouldn't normally have sufficient retain earnings. If the business needs any cash for the future, it would borrow from resources like equity or debt market segments which will raise the cost of the capital

As per the judgment of the Director C, dividend obligations should be avoided because of the pursuing reasons.

If the business does not pay dividends to its shareholders, the cash can be employed for future years growth of the business. There would also be considered a dual gain both to the company and the shareholder, where the shareholders might not need to pay an tax on dividend as well as for the company, they don't need to pay any business deal cost.

Thus we conclude based on the managements' views of any company on dividend obligations and the result on company value. Because the dividend policy is a natural effect of dividend theory being applied, the conclusions to the are categorised under the dividend regulations, like the managed dividend coverage, and also there is a outcome of the relevant dividend theory and the rest of the dividend policy, a consequence of the irrelevant dividend theory.

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