Question

Alan Homes serves on the board of directors of Flynn Company. The president of Flynn told him that in three weeks the corporation would announce a 25% increase in dividends. Alan called his neighbor to tell him to buy some stock. The neighbor told his friend about the stock, and that friend told him that Alan was acting unethically. The neighbor called Alan back, and Alan told him that no one would know the difference, that in business this happens all the time, and that he shouldn't be left out. Do you think Alan's behavior is appropriate? Write down your recommendation to Allen's neighbor.

Answer 1

My recommendation to Allen's neighbor is not to buy the stock and reasons for this are given below:-

1- If a company 25% increase in dividend that does not gaurantee of company's growth in terms of funds and share

value.

2- The dividend paid to customers can not be utilized for growth of the business.

3- After paying high dividends Flynn has minimum money to growth the funds.

4- Investors will have to pay the tax on 25% dividend value received because dividends are taxable article.

5- Dividends are not gauranteed income forever although it can be stopped any time by Flynn company.

6- Dividends always have a broad effect on equity rates if any time dividends are cancelled then share price will

increase at a higher rate and investors will definately loose his/her shares due to minimum dividend pay out.

7- Only focusing on high dividend paying comapnies like Flynn will cut the maximum chances of additional new

investment in market in terms of profit gaining.

Conclusion:- In my opinion Allen's behavior is not appropriate because of not thinking/Analysing about profitability,overall debt management, liquidity ratios, asset management, cash flow( in last 5 years) and long term investment plans of Flynn Company. All these things mentioned above are very important for any investor to gain long term benefits from Dividends.