Financial Management in Company (DOC)

Financial Management
Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1

TASK...............................................................................................................................................1
Part A......................................................................................................................................1
Part C......................................................................................................................................5
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
The main motive of financial management is to arrange the financial requirements of the
company for satisfying the short term and long term requirements of funds of the company. The
dividend decision is the concept of risk return trade off. It is very important for the company to
form a dividend decision in order to form a dividend policy. Dividend policy implies that how
much of the net earnings of the company should be retained and how much of it should be
distributed among the shareholders (Brigham and Houston, 2012). Mergers and acquisitions has
been a very important strategy for the entry and expansion of the firms. Merger takes place when
two or more companies combines together where one company loses its existence and the
another company survives and expands. Acquisition is the process of acquiring ownership in
another company by way of acquiring assets and liabilities.
TASK
Part A
Dividend payment decision is the most crucial financial decision that a corporate
company has to make, which is why it is the most debating issue in the corporate and financial
industry across the globe. The dividend is that portion of the after tax profits of the firm which is
being distributed to owners or the shareholders of the company on the basis of the shares
acquired by them (Huston, 2010). Dividend payment decisions are a very important decision
because it effects the availability and the overall cost of capital. The dividend payment decisions
are made by the board of directors of a company and is approved by the shareholders of the
company in the annual general meeting held by the company. The shareholders of the company
do not have right to ask for a higher rate of dividend and increase in the rate of dividends in
comparison to previous years. But it is the duty of the board of directors to set a dividend pay-out
ratio that maximises the shareholders’ wealth. The dividend decisions are important and crucial
because it influences the capital of the company and it also influences the share prices of the
company.
Dividend policies:
Every firm has different dividend policies, the dividend policy of a company divides the
total after tax profits made by the company into earnings that are retained and dividends that the
company will distribute among its shareholders. Retained earnings are those part of the net
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earning which company retains for the long term financial growth while dividends are distributed
in cash to the shareholders. Dividend policies are governed in major two of the following ways:
Long term financing decisions: When the companies take decisions regarding long term
financing, net earnings are viewed as source of financing. When the companies have profitable
investment opportunities they retain the earnings and invest the amounts in those investments,
the form grows at very fast rate when company accepts such profitable projects. Retained
earnings are preferred by the companies because it does not involve floatation cost. Payment of
cash dividends reduces the amount of fund that company have for investing on those projects.
Hence earnings are retained for investing in profitable projects for long term financing that
otherwise would be distributed as cash dividends.
Wealth maximisation dividends: This dividend decision focuses on maximising
shareholders’ wealth, because of the imperfections and uncertainties in the market the
shareholders prefer annual cash dividends rather than future dividends and capital gains. The
annual cash dividends increase the market value of shares, higher dividends lead to increase in
the prices of the shares and low dividends decrease it. But there should be a proper balance in
both the policies because if the company retains more earnings than it will decrease the market
price of shares whereas if it does not retain earnings than it will lose the profitable investment
opportunities which will decrease the future prices of the shares. Thus, company should manage
an optimum balance between both policies in order to benefit in both the short and long terms
(Brusca, Gómez‐villegas and Montesinos, 2016).
Dividend and valuation: There are conflicts in opinions whether there is impact of
dividends on the value of the shares and the cost of capital of the company. Some of the theories
state that there is relevance of the the dividend in the valuation of the firm, on the other hand
some theories state that there is no relevance of dividend in the valuation of the firm.
Relevance theory: This theory implies that dividend policy of the firms has a impact on
the valuation of the firm, that means dividend policy is relevant. Which implies that change in
dividend policy of the firm will bring a change in the market price of the shares of the firm. If
dividend is considered as a relevant factor in the market value of the firm than their must be an
optimum pay-out ratio. Optimum ratio is that ratio which maximises the market value of a firm.
The following theories shows that there is relevance of dividend:
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