Question

Which market imperfections lead a cost of outside capital? How do the availability and cost of outside capital affect payout (dividend) policy?

Answer 1

what do you mean by imperfect market?

Let us understand meaning of imperfect market, it is th market where price and production is imperfect. it refers to any economic market that dos not mt the standard perfectly or competitive market.

in this market individual buyers and sellers can influenc prices and roduction, there is no full disclous of informaion abut products and prices.

Here we can see high barriers to entry or exit in the market.

imperfect competion we can find in these market:

• Monopoly
• Oligopoly
• Monopolistic Competion
• Monopsony and Oligopsony

These market lead a cost of outside capital, companies must raise funds from ouside sources.

Now let us understand how does availability of funds and cost of outsidee capital affect payout policy.

Availability: Availabilty of funds after deducting taxes will affect to take dividend payout policy  in Availability two implications:

• More availabilty: At this stage companies will declare high rate of dividend policy.
• Less Availabilty: During this stage companies will declare less rate of dividend policy .

Outside capital: Outside capital means how much the company raised funds from outside sources like debentures, financial institution loans, commercial loans, public funds etc. similarly here also two implications:

• High rate if interest: if company raised funds with high rate of interest rate then the company must declare low rate of dividend payout policy.
• Low rate of interest: if comany rraised funds with low rate of interest rate then the comany must declare high rate of dividend payout policy.