Question

Suppose Care-4-You Hospital has two million dollars of net income remaining at the end of 201x. The financial managers must decide whether to retain all the earnings or pay a dividend to stockholders.

Discuss the advantages or disadvantages of retaining the money in the business versus paying a dividend to the stockholders. (5 points)

Answer 1

Advantages of retaining the money in business :

1. Retained earnings strengthen the financial position of business by increasing its stability.

2.Retaining earnings will increase the stock/market value of shares.

3.They will provide funds to company for expansion or any technological research activities without going for Debt/fresh issue of shares

4. In future if retained earnings are high the company can declare bonus shares.

5 Retained earnings lead to long-term capital gains which are taxed at lower rates.

Disadvantages of retaining money in business :

1.when profits are retained without declaring dividend the investors will be less attracted to invest in company rather than a company that declares dividend.

2 .Due to high accumulation of retained earnings the capitalizacapi of company will increase.

3.shareholders/investors think dividend is less risky than potential future capital gains, hence they like dividends and they value high payout companies high value.

4. Inefficient use of funds will reduce the value of company.

Thank you hope you are satisfied.