Question

1. Does dividend policy matter?
2. Why might a low dividend payout be desirable?
3. What information does an increase in dividends convey?

4- Define risk premium and its relationship with beta

Answer 1

1. Yes, the dividend policy matter for the firm and the shareholders , It is one of the way to distribute the profits earned by firm to the shareholders.

One can judge the type of company from its dividend policy . If a firm has policy to pay low dividend then the firm must be in growing stage and it might retain the profits for capital expenditure. If a firm has policy of paying high dividend then firm might be at stable stage and at this stage the capital expenditure might be low and less earnings growth visibility.

2. Low dividend payout might be desirable if the company is at growth stage and utilizing the shareholders money in capital expenditure and growth of company so that return on equity of shareholders can be increased.

3. Increase in dividends convey that company does not have plan of capital expenditure and shareholders can invest the profit money and can get better returns then lying cash ideal in balance sheet.