Financial Management Individual Work 2 Week 6 Essay

Financial Management Individual Work 2 Week 6 - Essay Example theory that explains that dividends at hand are preferred by investors to dividends retained in a company in which the dividend policy would have affected the value of the firm. The theory was put forward by John Lintner and Myron Gordon. They argued that investors perceive dividends at hand to be less risker than dividends of potential future capital gains. Stockholders therefore prefer actual dividends to retained earnings. Tax preference theory knows that there are two tax related reasons for believing that investors may prefer low dividend payout to higher dividend payout. The taxes on capital gains are only paid when the stock is sold but when it is held by a person; no capital gains will be due at any given point in time. a.3 The theories are one way traffic such that if the dividend irrelevance theory is right, then dividend payout has no significance hence the firm can follow any dividend payout. If the bird in the hand theory is relevant, the firm can set a high payout if it wants to maximize the stock price. If the tax preference is accurate, the firm can set a low payout if is to maximize the stock price. Therefore in general, the theories are in total war with one another. a.4. Regrettably, empirical tests of theories have not been in conclusion, so it is absolutely difficult to tell if investors prefer either dividends or capital gains. However, the firms’ managers’ can use the analyses to a reasonable and rational decision over dividend policy. b. 1.Different groups of stockholders choose different kinds of dividend payout policies for example pension funds which are tax bracket. This kind of group of stockholders might prefer high payout stocks. Investors can sell their stocks and incur some transaction costs hence forcing sales to be made in a down market. 2. Clienteles are in existence and the question that arises is whether there are more members of one clientele than the rest. There are relevant costs such as taxes and brokerage costs