Question

1. Discuss the dividends policies that you would expect startup, growing, mature and declining business to adopt

2. Giving reasons, explain the expected financial risk, business risk and dividend payout in a declining business

Answer 1

1. A startup business requires high amounts of funds at regular intervals to consolidate its position in the market, to expand as well as for interest payments to creditors. In such a scenario, it is not feasible for them to shell out a part of their profit for paying dividends.

A growing company is on the path of expansion. If at this stage it is making good profits then small dividend payouts will be a good option to repay back the investors' trust in the business as well as to attract new investments by highlighting the company as a high yield business house.

A mature business must ensure that it does not retain back the whole of its profits, especially if the stock prices maintain a fairly modest growth rate. This is because the company is already consolidated and is expected to be financially sound. A decent dividend payment ensures that the investors do not leave the company for some other company.

A declining business should aim to retain back whatever profits it makes so as to plan a revival of the company. Divivdend payouts will only weaken the cash position of the company, thus limit the chances of regrouping, rebranding and restructuring thus causing its prices to turn very volatile.

2. Business risk refers to the company's ability to pay off its operational expenses from the revenues generated. A declining business generally can manage to pay off its operational expenses from the revenues generated by it due to the leverage it created during its growth and maturity stages. Financial risk refers to the company's ability to meet the debt and interest payments. A declining business sometimes tends to default on credit payments because it is of the opinion that directing cashflows towards operations will ensure revival and give later chances to them to pay off the debts and the associated interest payouts. As far as the dividend payouts is concerned, the company should not sway to appease investors and instead remain tight-fisted about its dividends. Any how, dividends are paid out of profits thus meaning that it cannot be a debt burden to the company in any case.