Usually, the Board of Directors increases the dividend per share only slowly in response to rising...

Usually, the Board of Directors increases the dividend per share only slowly in response to rising earnings and is even more reluctant to decrease dividend per share than to increase it. Give reasons for this behavior pattern. Is this behavior more likely to be observed under an imputation tax system than under a classical system? Why? Or why not?

Expert Solution

Dividend decisions are to be made wisely by the company as they have a great impact on the market price of the company's shares.

a. Directors declare a steady and gradual increase in dividend per share as it boosts confidence in amongst the shareholders and the market about the financial condition of the company. The year on year increase in the dividend shows that the company's profits are also increasing annually and has confidence in its future revenue and linked profits.

b. The reason for giving a small raise on dividend per share is that there are multiple shareholders and the sum amount to be distributed results to be very high. Companies cannot afford to distribute all the earned profit as dividend as it can have future repercussions. Also, bulk distribution of dividends creates an impression in the market that the company has a lot of cash in hand and is failing to invest in potential opportunities.

c. Dividends are never or rarely seen a decline because it creates an impression in the market that it is facing losses and the market can react negatively affecting the market share of the company and eventually affecting the revenue for the next financial year.

I hope this answer has given you enough clarity as to why directors make the decisions that they need to take.

If you have further thoughts please write down in the comments and I will help you with the same.

jeff jeffy answered 1 year ago

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