The dividend decision is an integral pct of the firms strategic financing decision. It essentially involves a firms directors deciding how frequently of the firms earnings, after interest and taxes (EAIT), should be distributed to the firms average shareowners in return for their investment in the firm, and how much should be retained to finance future growth and development. (Sterk and Vandenberg 2004 441-55)The design of the firms dividend decision, like all financial decisions, should be the maximisation of shareholder wealth. If an optimal dividend polity does exist then clearly managers should revive themselves with its determination; if it does not, then any dividend policy lead do, as one policy will be equal to another. It should be noted that the dividend decision and dividend policy relate only to ordinary share capital. (Asquith and Mullins 2003 77-96)The payment of election share dividends is not considered part of a firms dividend policy, as the level of, or method of calculating, the preference dividend is fixed in advance by the terms and conditions of the authoritative preference share offer. Once a dividend policy has been formulated, ambit out the amount and timing, etc. of dividend payments, it should be followed with stability and concord as its guiding principles.
As we shall discuss later, changes to a firms dividend policy can be interpreted in various ways by the financial markets, sometimes with dramatic consequences for the firms share price. You will note that the dividend decision is made at the level of the firms close to senior managers - at board of director level. It is the directors who will steady down the amount and timing of dividend payments. Under UK company law the directors cannot be compelled to recommend a dividend and shareholders cannot vote themselves a higher dividend than that recommended by the...
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