Arguments for Determination of Payment of Dividends

Running Head: CORPORATE FINANCE
CORPORATE FINANCE
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1CORPORATE FINANCE
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Arguments for Determination of Payment of Dividends...........................................................2
Reference....................................................................................................................................4

2CORPORATE FINANCE
Arguments for Determination of Payment of Dividends
The investments is done by the shareholders in the companies for the appreciation of
capital as well as income. The company returns the profits to their shareholders either by cash
dividend or the share buybacks. The payout policy of the company is defined as the set of the
principles that guides cash dividends and shares value repurchased in any particular year. The
decisions of payout along with the financing decisions involves senior management and
board of directors, which are watched closely by the analysts and investors. The analyst is
having the concern regarding dividend and buy back of shares because dividend distribution
to the shareholders affects the returns of the investment as well as the financial ratios.
Moreover, the reasons that helps in driving the strategic decisions regarding dividend or share
buyback generally differs from one company to the other. These are based on various factors
such as current stock prices of the company, investment opportunities, applicable tax
structure of the company and so on (Arko et al. 2014).
The distribution of the dividend is done by the company from the profit after tax. The
companies that are having good balance of cash, pays the dividend in order to keep the
interest of the shareholders in their stock. It is one of the most common method for returning
the surplus of cash to their shareholders. However, there are two theory that are related to
declaration of dividend by the company (Floyd, Li and Skinner 2015). The first theory is the
dividend irrelevance theory and the second one is dividend relevant theory. The former
indicates the declaration as well as payment of the dividend that have little or no impacts on
the prices of stock. In case of this theory, the dividend does not adds value to the stock prices
of the company. Moreover, in the relevance theory, the choice of dividend policy affects the
firm’s value (Farre-Mensa, Michaely and Schmalz 2014).