dividend policy Essay

424 WordsDec 8, 20082 Pages
Dividend Policy A distinctive feature of corporations is that they issue shares of stock and are authorized by law to pay dividends to the holders of those shares. Dividends paid to shareholders represent a return on the capital directly or indirectly contributed to the corporation by the shareholders (Ross-Westerfield-Jaffee, 2005, pg. 388). Corporations view the dividend decision as quite important, because it determines what funds flow to investors and what funds are retained by the company for reinvestment. Dividend policy can also provide information to the stockholder concerning company performance (Ross-Westerfield-Jaffee, 2005, pg. 502). Dividend usually refers to a cash distribution of earnings however; it is acceptable to refer to a distribution from earnings as a dividend and distribution from capital as a liquidating dividend. More generally any direct payment by the corporation to the shareholders may be considered part of the dividend policy (Ross-Westerfield-Jaffee, 2005, pg. 502). As in the case of ArcelorMittal where the company decided to put in place a dividend policy that would payout a $1.30 per share per quarter a similar decision will need to be made in the case of Lester Electronics as they move forward with the Shang-wa merger. The Lester Electronics shareholders are accustomed to receiving dividends and it would seem that that expectation would continue with the merger. ArcelorMittal based the dividend return on future projects and the confidence that the company would continue to flourish. Lester Electronics shows on the combined income statement a projection for continued growth from this merger with Shang-wa Electronics so a similar dividend policy may be appropriate for the company. Instead of paying dividends, a company may use cash to repurchase shares of its own stock. Share repurchases are typically accomplished in one of

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