What managerial implications can be drawn from capital structure theories for dividend policy? Draw upon exapmles to illustrate your answer.

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Title : What managerial implications can be drawn from capital structure theories for dividend policy

Introduction

When a firm procures funds from investors or owners , there will be an explicit or implicit promise to pay return to them . The return is paid in terms of interest which is compulsory paid to all investors and owners , but the return paid to owners in the form of dividends is optional . The dividend decision by any firm , like the investment and financing decisions is also taken for maximization of market price of

the share

The term dividend refers to that the portion of profit (after tax ) which is distributed among owners /shareholders of the firm and the profit which is not distributed is called as retained earnings ' - Managerial Finance Weston J . Fred and Brigham , The Dryden Press , Illinois , Fifth Edition ,

. 698

Dividend Payout Ratio is determined by the dividend policy adopted by the company , and it is implemented to decide about the percentage of profits to be distributed by the firm to its owners /shareholders Dividend is always depends on the after taxes . There are a few factors that affect the Dividend policy of a company they are

Liquidity 2 . Growth Plans 3 . Control

Dividend Payout Ratio is also called as DP Ratio which is a mathematical value as

DP Ratio Dividend paid to the Shareholders / Net Profit after tax

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Capital Structural Theories

Capital structural theories are designed with a concept of valuation of the firm it is the earnings of the firm and the investments made by the firm . Capital Structural Theories also used to find the dividend payout for its owners /shareholders . Cost of the capital , investment and return on investment (ROI ) are a part of dividend policy

The relationship between leverage cost of capital and the value of the firm can be analyzed in different ways . Factors determining Capital Structure are minimization of risk , control , flexibility and the profitability of the firm . A firm 's capital structure is a combination of the firm 's liabilities (debts ) and the assets (equity and profits

For Example : A firm with 100 billion as capital structure has 40 billion from equity (shareholders and owners ) and the 60 million as debt (Loans and Funding , then the firm is said to be 40 - equity financed and 60 - debt financed

With cost valuation of the firm determined using capital structure and the net operating profit using EBIT analysis we can determine the dividend payout for owners and shareholders for the firm

Every firm has a dividend payout policy and it was always analyzed after the capital structure methods . There are some managerial implications that can be analyzed under capital structure theories for dividend policy , saying that dividend policies are always affected by the capital structural theories . Fundamentals of Financial Management , Harper and Row Publications , New York , 4th Edition

. 480

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There are two types of Capital Structural Theories

Non-Traditional Theories

Traditional Theories

Non-Traditional Capital Structural Theories

Net Income (NI ) approach...