Question

3.         You are the CFO of a company that is contemplating issuing dividends for the first time. Discuss, in as much detail you can, at least six issues you must consider when you structure a company’s dividend policy. Please structure your answer according to the theories and discussion in your text. (No more than 4 pages).

Answer 1

Six Issues you must consider when you structure a company’s dividend policy:

1. The CEO should consider which industry are they working in. Industries which are generally capable of generating stable earnings can declare a higher dividend compared to industies whose earnings are uneven.

2. An old company can distribute higher dividends, while a relatively new company might need excess cash for expansion purposes, thus they should declare low or none dividend.

3. If rate of return for company is greater than the rate of return for individual shareholders of the company, less dividend should be declared and vice versa.

4. Governmental policies related to taxation of dividends need to be considered.

5. The quality and quantity, both, of earnings should be considered. If the profit during the year is due to a non-recurring activity, company should not declare high amount of dividend, because the same amount of profit is not likely to recurr in the future years.

6. Liquidity requirements also need to be considered. If the company is in need of high amount of short term funds, high amount of dividend distribution would not be a wise idea