FNCE 3P93 Chapter Notes - Chapter 17: Tax Rate, Dividend Tax, Liquidating Distribution

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23 Nov 2017

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Should a firm pay money to its shareholders, or should the firm take that money and invest it for its. There are money good reasons for corporations to pay high dividends, but there are also many good reasons to pay low or no dividends. Dividends a(cid:396)e pa(cid:455)(cid:373)e(cid:374)ts (cid:373)ade out of a fi(cid:396)(cid:373)"s ea(cid:396)(cid:374)i(cid:374)gs to it o(cid:449)(cid:374)e(cid:396)s, eithe(cid:396) i(cid:374) the fo(cid:396)(cid:373) of (cid:272)ash o(cid:396) sto(cid:272)k. Distributions are payments made by a firm to its owners from sources other than current or accumulated earnings. Distribution from earnings are called dividends and distributions form capital as a liquidating dividend. When the dividends have been declared by the board of directors, the dividends become a debt of the firm which cannot be rescinded easily. Declaration date: date on which the board of directors pass a resolution to pay a dividend. Ex-dividend date: date two business days before the date of record, established those individuals entitled to a dividend payment.

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Question: How would you answer this students post with a paragraph or two with reference.

A company's net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings (Investopedia, n.d.). Since dividends are from net profits (or retained earnings) this helps explain why a company may issue or not issue dividends; meaning it depends on what the business intentions or strategic plan is (if they are in the build up or start up stage or want to invest in something large a company might not issue a dividend so they can invest that capital, or if they are larger company with a history of net income and retained earnings it may use a dividend as a means to reward their "owners" the stockholders). Also to consider a business does not have to issue dividends. It also may depend on how the board perceives growing income, either by stock price or thru dividends paid back when earnings are good. For example dividends "can" be taxed differently than other means of income meaning it may benefit the stockholders to receive that "income" thru dividends. Also to consider is, Economists Merton Miller and Franco Modigliani argued that a company's dividend policy is irrelevant, and it has no effect on the price of a firm's stock or its cost of capital (Investopedia, n.d.). Although not perfect, the theory states one can have the same effect either by dividend or use of the stocks to make the same effect, although this does not include items such as tax breaks, etc.

Adam Ketch

Reference:

Investopedia (n.d.) Dividend definition. Retrieved from http://www.investopedia.com/terms/d/dividend.asp

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What does information on dividends and bonds issued by a company say about its financial health? A lot, as you might have guessed.

Companies issue bonds to finance operations. A bond rating is a grade given to a (corporate) bond that indicates its credit risk. For example, a rating of "Aaa" from Moody's means an investment grade of "Highest Quality." What is your company's bond rating? What does it say about the company's health and future prospects?

A company takes its dividend policy seriously. After all, it is a distribution of a portion of its earnings to shareholders, typically on a quarterly or yearly basis. Not all companies pay dividends to shareholders, and some may increase or eliminate future dividend payments depending on the performance of the company. Does your company issue a dividend? Has there been a change in its dividend policy recently?

For this discussion, research the information on your company's (Kohl's)dividend and bonds. How would you assess the health of the firm based on the information you gathered? How are your company faring compared to the industry? To its competitor(s)? What (macroeconomic) factors did or will influence how it issues the dividend and bonds?

champagnegiraffe407

In 2010, the Keenan Company paid dividends totaling $3.6 million onnet income of $10.8 million. The year was a normal one, andearnings have grown at a constant rate of 10% for the past 10years. However, in 2011, earnings are expected to jump to $14.4million, and the firm expects to have profitable investmentopportunities of $8.4 million. It is predicted that Keenan will notbe able to maintain the 2011 level of earnings growthâthe high 2011projected earnings level is due to an exceptionally profitable newproduct line to be introduced that yearâand then the company willreturn to its previous 10% growth rate. Keenanâs target debt ratiois 40%.
a. Calculate Keenanâs total dividends for 2011 if it follows eachof the following policies:
(1)Its 2011 dividend payment is set to force dividends to grow atthe long-run growth rate in earnings.
(2) It continues the 2010 dividend payout ratio.
(3)It uses a pure residual policy with all distributions in theform of dividends (40% of the $8.4 million investment is financedwith debt).
(4)It employs a regular-dividend-plus-extras policy, with theregular dividend being based on the long-run growth rate and theextra dividend being set according to the residual policy.
b. Which of the preceding policies would you recommend? Restrictyour choices to the ones listed, but justify your answer.
c. Does a 2011 dividend of $9 million seem reasonable in view ofyour answers to parts a and b? If not, should the dividend behigher or lower?

chocolategrasshopper504

FNCE 3P93 Chapter Notes - Chapter 17: Tax Rate, Dividend Tax, Liquidating Distribution

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