Dividend Policy on Wealth Maximization
The dividend policy is viewed important by corporations. The dividend policy determines what funds are distributed to investors and what funds are retained by the firm for reinvestment. Dividend policies can provide the stockholders information about the performance of the firm. “The term dividend usually refers to a cash distribution of earnings. If a distribution is made from sources other than current or accumulated retained earnings, the term distribution rather than dividend is used.” (Ross, Westerfield, & Jaffe, 2005, p. 502.). Dividends can be of many various types such as cash dividends, stock dividends and stock splits. The most common type is regular cash dividends. Public companies normally pay regular cash dividends four times a year. “Paying a cash dividend reduces the corporate cash and retained earnings shown on the balance sheet, except in the case of a liquidating dividend where paid in capital may be reduced.” (Ross, Westerfield, & Jaffe, 2005, p. 502.).
Instead of paying dividends, a firm may use cash to repurchase shares of its own stock. “Share repurchases are typically accomplished in one of three ways. First, companies may simply purchase their own stock, just as anyone would buy shares of a particular of a particular stock. In these open-market purchases, the firm does not reveal itself as the buyer.” (Ross, Westerfield, & Jaffe, 2005, p. 509). The seller is not aware if the shares were sold back to the firm or to just another investor. Second, the firm could initiate a tender offer where the firm announces to all stockholders that are willing to buy a fixed number of shares at a specific price. Finally, firms may repurchase shares from specific individual stockholders.
Washi ...