What are the key components that influence a company's dividend decision?

Key components affect dividends.

• Firm's profitable position matters.

• Future income uncertainty impacts decisions.

• Liquidity affects dividend distribution.

Fill in the blank: A dividend is a distribution to shareholders out of ___ or ___ available for this purpose.

Profits or reserves

Explain the concept of the irrelevance of dividends as proposed by Modigliani and Miller.

Dividend policy does not affect share price.

• Investors are rational.

• No taxes or transaction costs.

• Market conditions are perfect.

True or False: The payment of dividends is always beneficial for a company's stock price.

False. The payment of dividends may not always enhance a company's stock price, as per Modigliani and Miller's theory.

What are the different types of dividends a company can issue?

The different types of dividends include cash dividends, stock dividends, bond dividends, and property dividends.

Riddle: I can be cash, stock, or even property, but I’m a piece of profit shared with you and me. What am I?

A dividend.

What is the relationship between the cost of equity capital and the internal rate of return in Walter's model?

Cost of equity impacts dividend policy.

• High IRR signals profitable investments.

• Dividends should be distributed.

• Shareholders prefer higher returns.

Fill in the blank: A company may issue a ___ dividend when it has insufficient funds to pay cash dividends.

Bond

Describe the stable dividend policy and its significance.

Stable dividend policy offers predictability.

• Ensures consistent returns for investors.

• Attracts income-focused shareholders.

• Reduces investment risk perception.

Explain the criticism of the MM approach regarding taxation.

MM approach overlooks taxation effects.

• Assumes no taxes exist.

• Ignores tax influence on returns.

• Affects investor behavior significantly.

True or False: According to Gordon's model, the firm can use both debt and equity financing to determine its dividend policy.

False. Gordon's model assumes that the firm is an all-equity firm with no external financing.

What factors might limit a firm's ability to pay dividends?

Several factors limit dividend payments.

• Cash needs for operations.

• Contractual obligations to creditors.

• Legal constraints and profitability.

Riddle: I'm often retained for future growth, but I can also be given as a reward for your trust. What am I?

A dividend.

Fill in the blank: The ___ policy is where a company does not pay any dividends due to unfavorable financial conditions.

No dividend

What are the main types of dividends that a company can distribute to its shareholders?

The main types of dividends are cash dividends, stock dividends, bond dividends, and property dividends.