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Dividend S Policy: - Legal Restrictions

Dividend policy must consider legal restrictions on paying dividends if unprofitable or in bankruptcy. Companies should also watch for covenant restrictions. The appropriate policy depends on a company's growth rate, access to capital markets, capacity to maintain dividends, and tax implications of dividends versus capital gains. Mature companies with stable cash flows can pay more dividends while high growth companies should be conservative to retain capital.

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Franco Imperial
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50 views

Dividend S Policy: - Legal Restrictions

Dividend policy must consider legal restrictions on paying dividends if unprofitable or in bankruptcy. Companies should also watch for covenant restrictions. The appropriate policy depends on a company's growth rate, access to capital markets, capacity to maintain dividends, and tax implications of dividends versus capital gains. Mature companies with stable cash flows can pay more dividends while high growth companies should be conservative to retain capital.

Uploaded by

Franco Imperial
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Dividends policy

Legal restrictions: How easy is it to raise new equity


- Cannot distribute dividens if for the company?
company is under chapter 11
- Cannot distribute dividends if
company is not generating Access to
profits Watch legal capital
Other: restrictions markets
- Covenants Companies with high growth
rate should be more
conservative distributing
Understanding tax rates dividends
on dividends vs tax rate Growth rate A more mature business has
on capital gains is critical of the more visibility over cash
to define best way to Pay attention company flows generated and needed,
remmunerate shareholders to tax
therefore can be more
considera-
aggresive with its dividends
tions
policy

Reduce cost of Capacity to


agency and send maintain A cut-back in dividends has a very
information to the dividends negative effect
A dividend creates discipline in costs market Before distributing a dividend
and hence reduces costs of agency
make sure the company can
Paying dividens sends information to maintain it in the future
the market about the financial
situation of the company
1

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