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Question: At the Board meeting, an argument arises over the payment of dividend to shareholders. Mr. A argues that is not necessary to pay a dividend as shareholders see receiving dividends now or receiving capital gains in the future as equally attractive. You are to argue convincingly to the Board, by providing 4 reasons, that they support the payment of a dividend. Make references to the various theories on dividends.
Answer: Dividends are distributions made to shareholders from the firm’s earnings, whether those earnings were generated in the current period or in previous period. However, dividend policy involves the decision to pay out earnings to those shareholders or to retain the earnings for the reinvestment purpose in the firm. A company should pay out the retained earnings to the shareholders because of the following reasons or theories:
2.1 Bird-in-hand Theory
Bird-in-hand theory holds that the firm’s value will be maximized by a high dividend payout ratio, because investors regard cash dividend as being less risky than potential capital gains. Also, according to Myron J. Gordon, dividend payments are cash in hand whereas capital gain is relatively uncertain. He argued that dividend which expected in the near future is less risky than those expected in the more distant future....(short extract)
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- Subject: Business and Management
- Course: Accountancy and Finance
- Level: Degree
- Year: 2nd/3rd
- Mark: 64%
- Words: 1725
- Date submitted: April 12, 2009
- Date written: Not available
- References: No
- Document type: Essay*
- Essay ID: 1341
