Czinkota (2007) emphasized the company’s dividend policy affects clientele investment options and is relevant to the shareholders’ tax obligations. The research focuses on the company’s dividend decision as one of the critical aspects of management’s financial activities. The research delves into the relevant dividend distribution theories. In the same manner, the research spotlights the effects of the company’s dividend guidelines on the clients. The research delves on the relationship between the dividend distribution effects on the clients’ and the clients’ tax payments. Shareholders invest in companies to generate dividend income.
Hansen (2006) insists there are several dividend policy theories that are relevant to management. First, companies must generate higher revenues to generate higher dividend payouts. Many shareholders prefer to invest in companies having a trend of distributing dividends to the clients. Investors generally receive lower dividend payments from companies generating lower revenues.
Second, Hansen (2006) theorises several companies distribute dividends during profitable time periods. To explain, dividends are arrived at by dividing the company’s total net income by the number of outstanding shares held by the clients. An investor having more number of outstanding shares will receive more dividends as compared to an investor having lesser number of outstanding shares of stocks. The organizations pay higher dividends to its clients during profitable time periods.
Third, Hansen (2005) proposes dividend payout is not financially viable when the company generates a net loss amount in one accounting period. Most investors know the company must produce enough revenues to generate profits. The greenhorn investor learns the most appropriate time to invest in a company listed in the London Stock Exchange in order to receive dividend payments. The company’s failure to generate a net profit discourages the present and prospective clients from investing in the company.
However, McDonalds (2007) emphasizes there are some irrelevant theories that do not have any effect on the company’s management. First, the company pays its loan obligations on time; the company’s dividend payout policy is irrelevant in this financial situation. The company normally pays the cost of using capital to generate revenues during profitable and unprofitable months.
Second, McDonald (2007) insists the company’s dividend payout policy is irrelevant to the company’s compulsory duty of implementing United Kingdom’s environmental laws. The organization does not pollute the nearby pristine river by throwing its wastes whether dividends are paid or not. Likewise, the organization does pollute the community’s air by placing high smoke stacks during the organisation’s entire existence. The United Kingdom government punishes any organization found violating the nation’s environmental laws; the dividend payment issue is not a relevant issue.
Third, Weygandt (2005) theorizes the company’s dividend payout policy is irrelevant to the company’s goal of increasing its revenues. The company creates products that are of better quality than its competitors without taking into consideration as to when the company will distribute dividends to the shareholders or clientele. Normally, the company sells its products and services at lower prices compared to the competitors’ selling prices. The lower prices increase the current demand for the company’s products and services.
Fourth, Weygandt (2007) proposes the company’s dividend payout policy is irrelevant to the company’s compliance the United Kingdom statutes. The United Kingdom organizations implement the local statutes to avoid penalties and fines. The organisations’ compliance dose not take into consideration the company’s actions of either distributing or not distributing dividends. For example, the company selling prohibited drugs is punished for violating the nation’s laws.
Analysis and Discussion
Czinkota (2007) emphasises the amount of the dividend distribution decision is critical to an organisation’s financial management; financial management’s dividend policy has a significantly effect on the clientele. A majority of the clients do not prefer financial management’s dividend policy of distributing dividends because the activity reduces the amount of investment funds. The undistributed retained earnings can be used to set up a new branch. The undistributed retained earnings can be used to buy new equipment that increases production.
On the other hand, Gowthorpe (2005) emphasises other clients prefer financial management’s dividend policy of withholding dividend payments. Some clients adhere to the company’s management decision to use the undistributed dividends to buy more production equipments. The new equipments increase production outputs. Consequently, the increase in production translates to higher net profits. Next, the increase in net profits increases dividend payments.
Furthers, Hansen (2006) proposes some clients accept financial management’s dividend policy of delaying dividend payments to reduce the company’s need for borrowed funds. The company’s decision to pay dividends to the clients reduces the company’s available cash. On the other hand, delaying the company’s dividend payments increases research, development, and other investment funds
Consequently, Horngren (2000) affirms some companies resort to borrowings to fund the company’s setting up of a new production plant in China, India, France, Germany, or locally. Borrowing money is costly. The company must pay interest for the use of another person’s money. Borrowing money is a less profitable alternative when compared to using the withheld dividends to fund the company’s adventurous expansion plans.
Furthermore, Hansen (2006) proposes all clients accept financial management’s standard dividend policy of paying dividends to the clients from the company’s net profit amounts. Net profit occurs when the company deducts its costs of sales, marketing expenses, and administration expenses from the company’s net revenues. The net revenues are arrived at by deducting the company’s revenue returns, revenue allowances, and revenue discounts from the gross revenues. All clients comply with financial managements’ dividend policy to pay zero dividends during unprofitable accounting periods.
In addition, Hansen (2006) reiterates some of the clients dislike financial management’s dividend policy of withholding the current year’s dividend payouts on the ground such action reduces the company’s liquidity picture. Liquidity focuses on the availability of organizational cash to pay for the company’s current and future business research, development, and other business activities. A favorable liquidity position includes available cash for increasing the company’s current production and revenue figures.
The current ratio liquidity formula is arrived at by dividing financial management’s current assets (which includes cash) by financial management’s current liabilities. Based on the current ratio formula, an increase in cash will increase the liquidity aspect of the company’s overall financial picture; a decrease in cash will decrease financial management’s liquidity aspect of the company’s overall financial picture.
Likewise, Hansen (2006) theorizes the attitudes of some of the clients affect financial management’s dividend distribution policy. A clients’ meeting can decide to force financial management to release dividend payments for the current year. On the other hand, a handful of clients holding a majority share of the company’s outstanding shares of stocks can decide to delay distributing dividend payments; management uses the withheld dividend money to set up a new production facility in an uncharted competitor’s market segment.
Further, Hansen (2006) reiterates a majority of the clients (shareholders) understand financial management’s dividend policy of incorporating the market factor in its dividend distribution policy. Financial management can use the withheld dividends to renovate its dilapidated manufacturing plants to improve its depreciation amounts. Financial management can use the withheld dividends to fund its research and development of a new product to skyrocket its current revenues to unprecedented levels.
The reduction in dividend payments decreases external loan processes. Some of the clients comprehend the financial management dividend policy stating share value depends on corporate earnings. A company that generates a high corporate earnings financial picture will have a corresponding high share value. On the other hand, a company having a low corporate earnings financial picture translates to a corresponding low share value. In the same fashion, financial management’s presentation of a net loss financial picture paints an unprofitable share value.
Furthermore, Gowthorpe (2005) reiterates a majority of the clients (shareholders) accept financial management’s impression that the company’s share value depends on the dividend amounts distributed to the clients. In addition, share value depends on management’s financial prerogative. The company withhold the dividend money to pay the company’s expenses to achieve the organisation’s profit-based goals and objectives. The company’s operating expenses include the marketing expenses. Likewise, the company’s operating expenses include the administrative expenses.
Further, Hansen (2006) opined the clientele effect of the company’s dividend policy is relevant to the shareholders’ personal tax situation. Clients pay taxes on dividends received from the organisation. An increase in clientele dividends translates to higher clientele tax payments. On the other hand, a decrease in clientele dividends translates to lower clientele tax payments. Consequently, the company’s policy of withholding dividend payments to the clients precipitates to the clients’ zero tax payments.
Based on the above discussions, the clientele or shareholders place their hard-earned cash and other assets in companies to generate dividend income. The relevant theories pertaining to the company’s dividend distribution policies affect the clientele’s investment prerogatives. The company’s dividend decision policy is critical to the organisation’s financial management outcome. Withholding dividends reduces the clientele’s dividend tax payments. The company’s dividend distribution policy is one of the critical aspects of management’s financial activities. Indeed, the company’s dividend policy affects the clientele’s investment options and is relevant to the shareholders’ tax situation.
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Gowthorpe, C. (2005) Business Accounting and Finance for Non Specialists. London, Thompson Press.
Hansen, D. (2006) Management Accounting. London, Thomson Press.
Horngren, E. (2000) Cost Accounting, London, Pearson Press.
McDonald, M. (2007) Marketing Plans: How to Prepare them, How to Use Them. London, Butterworth –Heinemann Press.
Weygandt, J. (2005) Managerial Accounting. London, Wiley & Sons.