Dividend Policy at Fpl

Only available on StudyMode
  • Download(s) : 289
  • Published : April 22, 2012
Open Document
Text Preview
1)
Miller and Modigliani, the middle-of-the-roaders, opined that dividend policy has no effect on a firm’s value in a perfect and efficient capital market. The rightist believed that dividend payout increases the value of a firm; the leftist said that if taxes on dividend are higher than capital gains then companies should pay the lowest dividend policy and concentrate on capital appreciation; also that companies should use instead those monies to invest for growth and development that appreciate capital. Evidence have suggested that capital markets are less than perfect due to imperfections like transaction costs, financial distress, the possibility of bankruptcy and the associated bankruptcy costs; thus implying that dividend policy has an effect on the value of a firm, contrary to what Miller and Modigliani opinionated. Evidence has also suggested that the marginal tax rates on dividends are normally higher than on capital gains and that capital gains tax can be defer by reinvestment of the proceeds. Why then should companies pay dividend by following the rightists view? The following are some of the reason why companies pay dividends: •Some investors require a steady stream of income. It can be argued that they can have this by selling shares; but because of transaction costs, it is preferable for them to have a stream of income instead. •Other investors are required to spend money out of income and not capital; as such they cannot sell shares and will thus require some dividend payments to meet maintenance requirements. •Also that investors may prefer some money now than wait to receive it the future because of the time value of money; a dollar today is greater than a dollar tomorrow. •To reduce agency costs that arises because of the separation of management and ownership. Management may want to build an empire through the accumulation of cash, which creates conflict by pursuing objectives that do not maximize shareholders value but increases...
tracking img