1. Why do firms pay dividend? What, in general, are the advantages and disadvantages of paying cash dividends? Because often dividends are perceived as spendable income (some stock holders look at stocks as a source of income as it is easier to get a dividend instead of selling the stocks). Sometimes investment opportunities are low, they reach the limit of their marketplace, so companies decides to distribute cash in the form of dividends. For some companies it is a way of showing that the company is stable financially and can fulfill the commitment of paying out a dividend. Also it is a way for companies to mitigate agency problems when they have excess cash. Advantages of paying cash dividends: · Way of keeping …show more content…
Therefore from FPL’s perspective it seems that the current payout ratio is not appropriate. Utility Companies require a lot of capital, and returns on invested dollars are small. A higher payout ratio would not be appropriate, especially in a changing environment where competition is about to surface. A lower payout ratio would be more appropriate as it would give the company the necessary cash needed for capital investments that would generate growth without high leverage. 4. From an investor perspective, is FPL’s payout ratio appropriate? Investors often look at utility companies for their high dividend yields and growth over time. Although a high dividend is something sought by investors in utility companies, a high payout ratio can represent a negative signal. The high FPL’s payout ratio gives the company little room for error; if earnings would be adversely impacted in the future the company would be faced with the possibility of not being able to pay the dividend. E(r)= (Div+delta price)/price=Dividend Yield+ Cap. Gains. We assume beta is .6 (page 6). Rf=7.3%; rm-rf=7.5% E(r)=7.3+.6*(7.5)=11.8%. The majority of FPL’s return comes in the form of dividends. With deregulation and possibility of increased competition, high interest rates, investors should look at the cost efficiency of FPL and its diversification. The fact that the company pursued
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.
The dividend payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. This is well evident with Pepsi Co’s dividend payout ratio of 45.95% as compared to Coca-Cola’s 20.11%. A low dividend payout is always better as it leaves more room for the company to increase dividend payouts in the future while a high ratio means there is less room.
When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends
Aside from the two aforementioned proposals the company can raise its leverage in other ways. By conducting DuPont analysis and understanding operating leverage we see that purchasing fixed assets and decreasing stockholder’s equity will raise the equity multiplier and the firm’s operating leverage. In this instance we recommend against this approach as the firm already has a large amount of excess cash above what they require to fund new positive NPV projects and purchase new assets. Investors would rather see their capital returned to them in the form of share repurchases and dividends as it is evident by the company’s cash stockpile that they can
Dividend Payout: Company M has a higher payout ratio of 31.12%. Reason why company N might have a low payout ratio can be attributed to investment in future projects with positive NPV due to the rapidly growing chain of upscale discount stores.
In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough
We believe that Ms Stark should not revise her recommendation regarding FPL. The HOLD recommendation seems to be the most appropriate. Our judgement assumes a dividend cut from FPL. However, this dividend cut would be a precise strategic choice rather than one dictated by financing difficulties. Specifically, the dividend cut will raise future growth, with little effect on the stock price.
First, current payout policies directly increase payout ratio by issuing large amount of new shares. High payout ratio shows that the company has to spare a large amount of cash to pay dividends rather than invest in more profitable projects.
The fact that shareholders are taxed twice through this repayment methodology infers that dividends are not their repayment technique of choice. Furthermore, paying out cash reserves through dividends also has the effect of both reducing the company’s assets and also inhibited the company’s ability to fund future growth as Dividends reduce the company’s retained earnings.
If no dividend are paid, the company does not need financing required for the dividends. Hence the company’s financing needs
If this ratio is high means company owns too many debts which may decrease their
A dividend is a usually distributed in cash form to stock holders of a corporation approved by the board of director. It may also include stock dividend or other forms of payment. A stock dividend represents a distribution of additional shares to common stockholders. Dividends are only cash payments regularly made by corporations to their stockholders.
Paying dividends will reduce the available funds of the company but is a way to increase shareholder value. Increasing or decreasing of DPR spells out the standing of the company to its shareholders. Reduction or not giving dividends for a period will reduce AFN but will mean that the company is struggling to provide enough profit. Shareholders may see this as a signal that further investments for the company are riskier.
The payout ratio is set at .30 from 2006 onwards. Notice that the long-term growth rate, which settles in between 2011 and 2012, is ROE × ( 1 – dividend payout ratio ) = .10 × (1 - .30) = .07.