Question

Discuss the difference between a passive and an active dividend policy. Why might the portfolio effect of a merger provide a higher valuation for the participating firms? Explain how exports and imports tend to influence the value of a currency.

Answer 1

1. Dividend is the portion of company's profit distributed to shareholders in proportion of their Investment

Passive dividend policy suggests that dividend would be paid if there is no better investment opportunities available with the company, any unused earnings are paid out in the form of dividends

While active dividend policy suggests that stockholder preference for cash dividend is considered very early in the decision process. Uncertainty surrounding future company profitability leads certain investors to prefer the certainty of current dividends

2. The portfolio effect of a merger provide higher valuation for the participating firms because of synergies or value addition which would not be possible by entity separately. This synergies is increase in competitiveness and resulting cash flows beyond what the two companies are expected to accomplish independently.

3. Export and Import impact currency exchange rates as supply and demand can lead to appreciation or depreciation of currencies. A country which exports more increases demand for its currencies leading to appreciation in value of currencies in contrary a country which imports more have less demand for its currencies leading to depreciation in value of currencies.