Question

1) Consider the optimal growth equation. If a company consistently grows faster than its optimal growth rate:

a) Does that mean equity is growing faster than under the optimal growth scenario?

b) If no, why not? If yes, isnt growing equity faster a good thing?

2) Why is lowering your dividend a way to help stimulate growth?

3) What kind of companies are more/less likely to issue a dividend? And why?

Answer 1

Ans 1)

A) Yes, it means equity is growing faster than under the optimal growth scenario

when a company's growth becomes greater than what it can self-fund. In these cases, the firm must devise a financial strategy that raises the capital needed to fund its rapid growth. The company can issue equity, increase financial leverage through debt, reduce dividend payouts, or increase profit margins by maximizing the efficiency of its revenue. All of these factors can increase the company's SGR.

B) Shareholder's equity may increase from selling shares of stock, raising the company's revenues and decreasing its operating expenses. Yes, growing equity faster is good for the short term as it reduce the operating expenses.

Ans 2) lowering dividend can help in stimulate growth as if company reduce dividend it can use that amount in the growth and development of the company.It results in Capital gains which occur when a stock appreciates in price and an investor sells at a higher price than he or she paid for the stock

Ans 3)Certain sectors also tend to pay more dividends than others. Historically, telecoms and utilities have capitalized on their local monopoly powers to lock in predictable revenue streams and provide excellent dividend yields. Technology stocks can sometimes pay high dividends, although with more variance than with utilities. Dividends in technology and biotech tend to be more hit or miss because of the high emphasis on growth.Companies declare dividends to signal financial health and confidence in future prospects. However, dividend signals are strongest after a company repeatedly pays dividends over a period of time. Companies that rush to pay too many dividends too quickly may find themselves stunting growth, sabotaging cash flow or reducing their ability to handle contingencies.

Sectors with less predictable earnings, such as industrials or consumer discretionary, tend to pay less because companies may need that money in a downturn. The last think anyone wants is a dividend cut.