Question

Explain how investors react to changes in a company’s dividend payout policy. Discuss what a firm’s payout policy indicates about the financial status of a company. Discuss how taxes impact an investor’s desire for dividends. In the long-term, how does a company’s payout policy impact the value of an investor’s portfolio (disregarding taxes)?

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Answer 1

Investors are generally reacting differently to the changes in the dividend policy of the company because when dividend payout ratio is increased, it will mean that there will be increase in the share price and investors will be more satisfied and when there will be reduction in the dividend payout ratio from it will mean that investor will b lower satisfied and it can lead to reduction in the market price.

Payout policy of a company is reflecting that how much the company is paying out of its profit to the shareholders and it will also be reflecting at whether the company's growth company of the company is a measured company and it will also reflect that how much the company is respecting the sentiment of the investor. when the company will be paying out higher amount of dividend, it will mean that the company is respecting the sentiment of the investor and it is matured company who does not have enough scope for growth whereas those companies which are growing companies will not be distributing higher amount of dividend because they will be reinvesting their profit back into the business.

Taxations will be reducing the desire of investor for dividend because dividend are having double taxation impact and Organisation will also paying tax on the dividend where as individual will be paying tax on dividend also.

In the long run, the payout policy of the company will be leading to increase in the value of the shareholders portfolio because declaration of dividend will generally lead to increase of the share price and it would be leading to higher valuation of the company in the market so dividend paying stocks are believed to be the profit making companies and they are often leading to creation of values for the shareholders.