What factors do firms consider when establishing a dividend policy?

What factors do firms consider when establishing a dividend policy?

Expert Solution

Factors firms consider when establishing dividend policy
1. Retained earnings: If the company can invest the retained earnings with higher ROE then the company may delay its dividend payment.
2. Stability in earnings. If the earnings are stable or growing the firm will payout dividend regularly.
3. Liquidity position: If the liquidity of the firm is not good the company may not payout dividends even if the retained earnings are high.
4. Financing needs of firm: Retained earnings also act as source of funding such like common shares. If the company feeds it needs to change it capital structure for better performance it might use retained earnings for funding projects.
5. Positive signal to the market: The Company may payout dividend to send a positive signal to the market about the company’s performance and to build trust among the shareholders.
6. Legal factors: The dividend policy may be designed to adhere to legal terms of the country in which it is operating

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jeff jeffy answered 2 years ago

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