Question

Can the wrong dividend policy bankrupt a firm? Why or why not?

Answer 1

Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will payout to shareholders some evidence suggests that investors are not concerned with companies Dividend policy since they cancel a portion of their portfolio of equities if they want cash.

This evidence is called dividend irrelevance theory and it essential indicates that and issuance of criminal should have little to no impact on stock price that being said many companies do pay dividends.

Corporate Dividend policy has remained very important but also and ambiougous issue in financial literature. A number of researchers have tried to determine that effect of Corporate Dividend policy on the value of firm.

If there is no net present value positive opportunities that is where the returns exceed the hurdle rate and excess cash surplus is not needed then finance theory suggest management should return some or all of the excess cash to shareholders as dividends this is a general case however they are exceptions

Management must also choose the form of dividend distribution generally as cash dividend or share buyback various factors may take into consideration where shareholders must pay tax on dividends from select to retained earnings how to perform a stock buyback in both cases increasing the value of shares outstanding financial theory suggest that Dividend policy should be set based upon the type of the company and what management determine is the best use of those different resources for the firm to its shareholders as a general rule shareholders of the growth companies would prefer managers to have a share buyback program where shareholders of a value or secondary stock would prefer the management of these companies to pay out surplus earnings in the form of cash dividends

A dividend policy is a part of a financial structure hence it is very important and if not planned wisely leads to bankruptcy dividend paid by the firm or viewed positively both by the investors and the firm.

The firms which do not pay dividends are rated in oppositely by investors does affecting the share price the people who support relevance of dividends clearly state that regular dividend reduce uncertainty of the shareholders that is the earnings of the form is discounted at a lower rate thereby increasing the market value however it's exactly opposite in the case of increased uncertainty due to non payment of dividend.

Dividend policy is an important factor for shareholders to consider in this stock selection process because dividends are a major cash outflow of Companies at first glance it may seem obvious that a company would always want to give back as much as possible to its shareholders by paying cash dividends.

So it is important for the firm to decide the Dividend policy in which its financial condition support because it is the backbone of the company.