Dividend Policy

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Question 1: What is the purpose of a dividend policy?

Answer: Dividend policy is popularly known as the policy that is used by the company to chalk out the dividend payout to the company's shareholders. Investors are allowed to sell their portions of share or portfolio whenever they are in requirement of funds which makes the dividend policy irrelevant to some extent. The shareholders, which includes the Company leaders as well, draw good amount of income through the dividend policies. It is the responsibility of the finance manager to frame logical and beneficial dividend policy which is challenging. Some of the important objectives of a dividend policy are wealth maximization, stabilizing the rate of dividends, increasing future prospects and maintaining the degree of control of the existing shareholders.

Question 2: What 3 factors influence the direction of a dividend policy?

Answer: There are several factors that influence the direction of dividend policy but the primary three are Dividend Pay-out ratio, stability of Dividend and Liquidity and divisible Profit.It is essential to calculate the proportion of earning that is being distributed as dividend and it is considered to be an important determinant of dividend policy. Financing of the future projects by the company becomes difficult if the dividend pay-out ratio is high. The Finance manager needs to consider the aspirations of the shareholders of the company before framing the dividend policy as stability is always demanded and preferred by the shareholders. The dividend policies are largely dependent on the liquidity position of a company as payment is directly associated with the availability of cash resources. Capital Profits are never taken to be the source of dividends. They are,infact, taken from revenue profits and so it can be said that dividends are part of divisible profits.

Question 3: How does the implementation of or changes to a dividend policy usually affect stock prices?

Answer: There are numerous ways in which dividends affect the stock prices but the most significant one is the impact on the market prices. According to the investors, dividends are a popular source from which they derive their investment incomes. A company is supposed to announce the dividend amount and the date it will be paid before it is finally distributed. This is followed by the date on which investors can last buy the shares to get the dividends. When investors show interest in buying new shares before the ex-dividend date, the price of the stock increases depending on the market activity. It is on the ex-dividend date that investors sometimes bring down the stock price as low as the dividend. In order to move forward in this competition, the company, Axetem Inc. needs to implement the "Bird in the hand Theory" according to which the investors should be paid their dividends instead of waiting of the capital gain or loss in the future.

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