Because often dividends are perceived as spendable income (some stock holders look at stocks as a source of income as it is easier to get a dividend instead of selling the stocks). Sometimes investment opportunities are low, they reach the limit of their marketplace, so companies decides to distribute cash in the form of dividends. For some companies it is a way of showing that the company is stable financially and can fulfill the commitment of paying out a dividend. Also it is a way for companies to mitigate agency problems when they have excess cash.
Advantages of paying cash dividends:
· Way of keeping managers in check ( agency problems)- high retained earnings don’t always max out shareholders’ value · Higher proportion of pension funds/ tax exempt institutions are the shareholders · Way of signaling value and stability of the business · Mean of distributing excess cash
· Gives you a choice you can buy more stock or invest the cash in something else · Stock prices tend to increase when dividend increases are announced
Disadvantages of paying cash dividends:
· Taxed at a higher rate than capital gains
· Limits growth the company has less money to invest so if they have positive NPV projects they should invest in them · They are hard to cut, once established cutting dividends often affects the price of the stock · Dividends have no impact on the value of a company, the stockholders can “create” dividends by simply selling the stock
2. What are the most important issues confronting the FPL Group in May 1994?
· The management is concerned by the “increasing risk facing the industry”. Deregulation in the utility industry ( Exhibit 1 – wholesale wheeling) · Decline in the S&P Electric Utility Index since Sept...