Question

An established corporation currently pays out 50% of earnings as dividends. The CFO asks you whether paying dividends to shareholders other than corporations is advantageous. How do you respond?

Answer 1

Dividend is a part of profit or earning (earning available to equity shareholders) of the company paid to their shareholder. Paying dividend is a good practice ,which will help to keep their shareholder happy because they getting return on their investment in addition to capital appreciation on the value of shares held by them. while paying dividend, company has to consider other factors as well such as cost of capital, addition or further capital requirements in the future period or future project,return on investment, debt outstanding, etc..

In this case CFO pays out 50% of earnings as dividend to shareholders otherthan corporations. As mentioned above paying dividend is a good practice but paying 50% of earning as a dividend is not good or advantageous unless that much money is iremain dle with the company. Usually company require addtional fund for future expansion,Research and development requirements, paying off debt obligation,working capital requirements, maintain Liquidity & slovency position, etc..CFO has to consider these factor before call for the decision.

Conclusion;

Paying 50% of earning is advantage only when that much of money remain idle with the company, The CFO should carefully analyse the fund requirement current and future and accordingly decided the rate of dividend. In my opinion CFO should reduce the percentage of dividend paying out of earnings, because the rate is quite high. It may put company in financial difficulties in the upcoming periods.