Question

How does the payment of a dividend impact Shareholders?

How does the payment of a dividend impact the Company?  

Answer 1

1 How does the payment of dividend impact shareholders?

Ans- When a company is having profits, it issues dividends to its shareholders. It helps the company to maintain its financial stability. These dividends are paid either in cash or additional shares of stock. In both the cases shareholders will be affected differentially because shareholders equity represents capital portion of company's balance sheet. so its affect can be valued by the type of dividend issued. when dividends are issue to shareholder by company, its retained earnings will get reduced by the amount of dividend issued. And even if dividends are distributed as additional shares of stock, the the value of stock will get reduced. While a cash dividend reduces shareholder's fund, a stock dividend simply rearranges the allocation of funds.

2 How does the payment of dividend impact the company?

Ans- As already defined above the meaning of dividends that they are distributed when company is having profits, therefore it will basically affect the company's balance sheet that too during the time of profits. Two way of dividend distribution are cash dividend and stock dividend. Cash dividend affects the company's cash becasue at the time of payable company records a liability in books which is set of during the time of payment. On the other hand stock dividend has no impact on cash , it affects shareholder's fund. while the payment of stock dividend, company's retained earnings got reduced. It will not impact the asset side side of balance sheet but only the equity side.