Organization Dividends Why Company Pay Dividend to Essay

Excerpt from Essay :

Organization Dividends

Why company pay dividend to shareholders? Why dividends not really affect the shareholders? What the shareholders prefer low or high dividends? Why, Explain?

A company may opt to pay dividend to its shareholders in order to make considerable earnings of the corporate profits. State's law varies on how dividends ought to be paid. Dividends do not really affect the shareholders because it is not compulsory for a company to pay dividends. Kurtz & Boone, (2011) indicates that companies are under no legal obligation to pay dividends to shareholders. Shareholders prefer high dividends because they earn more profits from their shares on the company (Kurtz & Boone, 2011).

In term of Dividends and Signals, Asymmetric information -- managers have more information about the health of the company than investors. Changes in dividends convey information:

Dividend increases

• Management believes it can be sustained

• Expectation of higher future dividends, increasing present value

• Signal of a healthy, growing firm

-- Dividend decreases

• Management believes it can no longer sustain the current level of dividends

• Expectation of lower dividends indefinitely; decreasing present value

• Signal of a firm that is having financial difficulties

Which is better for investors to increase their wealth? In what cases manage prefer to increase the dividend payment? And when they prefer to decrease?

Explain what the reason behind the dividend and signal that the company needs to change the dividend policy to take a decision either to pay more dividends or not? Explain (When they should pay more and when should they pay less)

Base on the signal, the market price will be up or down?

Investors ought to increase their dividends in order to increase their wealth. The reason behind this fact is that increase in dividends shows company's financial health (Kurtz & Boone, 2011). Dividends are of significant importance to the shareholders because they keep enjoying their contribution from the company's profit. There are some cases when the management of a company may prefer to increase the dividend payment. For example, a company may opt to increase dividend payment when it intends to look for secure current income. However, a company may opt to decrease dividend payment when it intends to reinvest its funds. This assists in increasing the value of the firm and increasing the market value of its stock (Kurtz & Boone, 2011).

A company may opt to change the dividend policy and increase dividend payment or fail to increase because of its future market predictions. Divided signaling tends to predict the future performance of a company (Kurtz & Boone, 2011). This means that a company may opt to pay more dividends when they signal considerable and great profits in future. However, a company may decide to pay less dividends after predicting a possibility of making minimal profits in future.

3. In Selling stock to raise funds for dividends also creates a "bird-in-the-hand" situation for the shareholder. Again, we are back to "all else equal." Can a higher dividend make a stock more valuable? If a firm must sell more stock or borrow more money to pay a higher dividend now, it must return less to the stockholder in the future. The uncertainty over future income (the firm's business risk) is not affected by dividend policy.

A higher dividend cannot make a stock more valuable. If a company opts to pay more dividends in a certain date and then pay fewer dividends on another date, the value of the stock will remain the same. For example, if a company, which has 100 outstanding shares, opts to pay $110 at date 1 then pay another $242 at date 2, the following expression shows how it the total value of its stock will be;

Let assume that 10% is the required rate of return, $110/1.10+$242(1.10)2=$300

This means that each share of the company is worth ($300/100) =$3.

The same case applies if the company opts to pay $200 dividend at date 1. This translates that the company ought to sell stock worth $90 in order to pay $200 at the end of its financial year. In this case, the available dividend at date 2 is $242 and the new stockholder requires a return of 10%. This means that the shareholders…

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