Dividend Policy as a Strategic Tool for Wealth Maximization

Topics: Stock, Dividend, Stock market Pages: 41 (12343 words) Published: April 5, 2013
The owner or shareholder of any business expect their investment to earn a return that reward is expected to be commensurate with the perceived riskiness of the investment. There are many alternative vehicles for the investment of capital, so a particular investment often be said to carry an opportunity cost. This is the difference between the actual return forgone from the alternative investment, olowe (1997) noted that the maximization of shareholders wealth is the most superior of all the objectives considers timing of return, take account of both return and risk and it balances short and long-term benefits. There is an important incentive sectors companies. In the case of a company listed on a stock exchange, shareholders who are not satisfied with the performance of their investment are able to sell their share and invest elsewhere, ownership rights are readily trade able and this provided a strong incentive for manager to focus on enhancing the value of manager to focus on enhancing the company (shareholders value). It is in the light of this that dividend decision ought to be evaluated with the aim of maximizing the firm to its shareholder through market price of the share and the current dividend. Rey holds (2001) noted that despite the common assertion that higher wealth gains to shareholders. Would result from the use of repurchases instead of dividends, firms continue to increases the size of dividends annually and not increases repurchase at an even faster rate. This indicates that dividend remain a mystery. The present research attempts to provide some owners in this regard. The problem at hand, then is to provide insights as to why some firms choose to pay cash dividend while other choose to pay cash dividend while others choose to repurchase their stock, and consequently, whether the choice made is in the best interest of the firm’s stockholders (that is, it is a wealth maximizing decisions) activities on the Nigeria stock exchange took a dramatic turn in the mid dos when the market capitalization doubled in 1995.This is a indication of the excellent performance of the market occasioned by the satisfaction of shareholders by the quote companies, however this could either be a result of the generous dividend policy of the quoted companies, greater interest in the stock market by the general public, greater awareness of the benefit of share ownership. E.t.c Shareholder’s wealth is also represented in the market price of the company’s common stock, which in turn is the function of the company’s investment financing and dividend decision. Management primary goal is shareholders’ wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock. Shareholders like cash dividend, but they also like the growth of EPS that result from sloughing earning back into the business. The optimal dividend policy is the one that maximizes the company’s stock price with leads to maximization of shareholders wealth and thereby ensures more rapid economic growth. The present study in intended to study how far the dividend payout has impact on share holds’ wealth. In general: and in particular to study the relationship between the shareholders wealth and the dividend payout and to analyze weather the level of dividend payout affects the wealth of the shareholders. This study shall examine the dividend policy of a Nigerian company with the view of justifying the increased market capitalization that has been witnessed in recent years. 1.2STATEMENT OF PROBLEM

A firm must decide each period whether to retain all it earning of distributes part of those to shareholders.Net earning are divided into two parts –retained earnings and dividends. The retained earnings of the business may be re-invested and treated as a source of long –term funds. The dividend should be distributed to the shareholder in order to...

References: Olowe R.A (1997) Financial management concepts, Analysis and capital investment briefly Jones Nigeria ltd, Lagos.
Pandey I.M (1983) Financial management 3rd edition. New Delhi vikas publishing.
Reyholds, N (2004) Management decision making and stockholder wealth maximization.
Chief Oye Akinsulire (2003) Financial management 7th edition ceemol Nigeria ltd, 11 Fowora close Ajao Estate of M/M International Airport Express way Lagos.
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