d policy and their implications on managerial decision making. Explain any three factors that should be considered when deciding the dividend policy to be implemented. Consider Company XYZ that wishes to spend K150,000 on new projects and maintains 40% debt financing. If the forecasted net income is K120,000: How much should the company pay out as dividends
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question Four
- Dividend policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (past or present) that should be distributed to the shareholders of the corporation. Discuss the theories of dividend policy and their implications on managerial decision making.
- Explain any three factors that should be considered when deciding the dividend policy to be implemented.
- Consider Company XYZ that wishes to spend K150,000 on new projects and maintains 40% debt financing. If the
forecasted net income is K120,000: - How much should the company pay out as dividends under the residual dividend model?
- How would a drop in net income to K80,000 affect the dividend? 6.Explain two advantages and two disadvantages of the residual dividend model.
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