Answer to Question #224424 in Economics for trippy niggaj

Question

(a)  Why is the dividend decision one of the major areas that a finance manager should pay particular attention to? What considerations must be taken into account when setting a dividend policy of a company?                                                           (12 marks)

Answer 1

Types of dividend policy

Conservative. Almost all the funds that the company receives in the form of net profit are directed to further development - equipment, buildings, structures, and other assets are purchased. Sometimes free money is spent on solving social issues - the payment of material assistance and bonuses to employees. In some cases, when using a dividend policy of this type, it is allowed to pay dividends on a residual basis - at the expense of the money left after investments in the company's fixed assets.

Moderate. Dividends are paid regularly in a certain, possibly minimum amount. In the event that the company receives increased profits, the basic amount of dividends can be increased by the decision of the board of founders. Such a policy allows ensuring the interests of both the enterprise itself and the investors who have invested money in it.

Aggressive. Almost all of the company's profits are spent on dividend payments. Shareholders can receive a good income from regular deductions from profits, but with this approach, the strategic development of the enterprise is almost not paid attention to, which is fraught with deterioration in financial results, a drop in the level of net profit, and, as a consequence, a decrease in the number of dividends in the future.

When forming a dividend policy, it is necessary to ensure a balance between the interests of the company and its shareholders. On the one hand, investments in the company's assets allow it to increase production volumes and improve financial results; on the other hand, attracting investors with regular dividends will help her get additional cash assets in a short period of time.