Question

Last November GE announced that it was cutting its dividend in half. What are the implications of this move to the stockholders? How might this impact other institutions such as pension funds? What has been the market reaction to the announcement? What is your assessment of GE's financial management's wealth maximization for its shareholders?

Answer 1

Cutting of Dividend :-

It may have following reasons

1) Fund Arrangements for new project

2) Reduction in profit of existing Business

This step may have following impact to shareholders

1) If profit of company get reduced and due to that company reduced dividend payment, share price will be reduced and investor may sale its investment.

2) If Dividend has been reduced for the purpose to meet the fund requirement than it would be better for the investor to hold the investment it may provide better results in future.

Impact on other institutions like pension funds

if Pension fund manager who has invested its funds in company will not get fund to distribute , which may raise liquidity problem. But funds which has not require immediate fund requirement may get better results in future.

Market Reaction on this move

1) share price may get reduced.

2) Many shareholders may sale their investments.

Wealth maximization :- company either pay divided or can hold for future in both cases wealth of investor will increase.

if performance of company deteriorated than only wealth on investor may get reduced.