Question

Is it possible to view a firm's equity as an option? What could be the implications?

If you were a CFO considering implementation of a dividend payout policy, which factors would influence your implementation plan?

Answer 1

Yes it is possible to view firms equity as an option.

One can consider the firms equity as an option with strike price of companys book debt. In any worst case scenario equity holders value will not go below the companys book debt. The first priority on companys cash flow goes to the debt owner and then remaining cashflows goes to the equity owner in adverse situations companys equity can be redemmed at the book debt ..Hence it gives right to equity owner to get back the money and consider at par with debt owner at adverse situation.

There are various factors that influence the dividend payout policy most important are as below

1. In a growing company when there is scope of capital expenditure is huge to expand business company generally wont payout dividend but will take those earings in expanding the business

2. In situation. when company is at stable stage and when there is no requirement of capex and company has steady cash flow then company might think to let out more of dividend to shareholders.

So these are the factors that influence the implementation of dividend payout policy.