Dividend Policy and Goals of Firm
The optimum dividend policy of a business firm is that policy which advances the goals of the firm. The primary goals of the firm are :
Increase Financial Assume Social
Goal of firm =
Welfare of Owners. Responsibility
The financial welfare (wealth) of the owners is increased when they receive a higher receive a higher composite rate of return on their investment (Bradley). The formula for this is :
Composite Rate of Return on =
Cost of Owner’s Equity =
[Profit (D) received + Capital Gains]/ Cost of Investment (P0)
Management seeks to increase the sum of items in the numerator, Dividends and Capital Gains, over which it has to some control. Thus some companies pay internationally small current dividends growth companies, for example, others large current dividends, and still others follow a middle path. When a company over a period of several years distributes as dividends only a small portion of available profits. the expectation is that future profits distribution will increase and it will increase the future market price of shares. In summary, a high composite rate of return – the maximizes shareholder’s wealth is one object of the owners after they have purchased shares in a particular company. Wheather the corporate management deliberately tries to do that in practice is however, a debatable issue.
The assumption of social responsibility is, or should be, given some weight in determining the dividend payout ratio. Higher dividends when the economy is in slup so as to activate a sluggish capital market. forced corporate savings and investment by curbing consumption with low divided payment; for accelerated growth in developing countries like ours, higher wages and better hiring policies, reduction of cost to consumers or improvement in the quality of goods and services and use of profits for research and development, education, and other social work, etc. may be cited as some of the examples of social responsibility affecting dividend policy. A certain amount of social responsibility is probably a good idea; to much of it might be open to question in a large company in which there are a number of shareholders. The interests of the owners cannot be cannot be completely relegated to this background.