Answer to Question #237659 in Finance for De Bankez

Question

(1).Is dividend policy a type of financial decision or it is a type of investment decision? Explain

(2).as the company's financial manager would you recommend to the board of directors that the company adopt a stable dividend payment per share or a stable dividend pay out ratio?

What are the disadvantages of each?

Answer 1

(i)

Dividend policy is a financial decision relating to dividend policy. Dividend refer to part of profits available for distribution to equity shareholders. The payment of the dividends should be analyzed in relation to the financial decision of a firm.

(ii)

The company should adopt the stable dividend payout ratio because the dividends heavily rely on the company's earning ability and no permanent specific ratio.

 

Disadvantages

Stable dividend per share

The reserve created allows the company to distribute dividends even with low earnings or even when making losses thereby causing chaos in the company in case of instability. This can make a company fail to invest or even have difficulties in operation.

Stable dividend payout ratio

If the income of a company is low, the shareholders may not get any dividend because the management fix dividends