Dividend Policy Case Study

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1.1 Background of the study The capital investment expenditures is one the most significant aspects of managerial decisions and the most important one of business investment decisions. Since it is more complex and usually involve a huge cost, any decision in this regard will have a long-term impact on the economic value of the enterprise. It is, therefore, important to make a careful study by the top level management before making any capital investment expenditures decision (LAL 2000). Due to these important, there is an extensive empirical literature testing the capital investment expenditures as the important one of business investment decisions and its constraints. Although an extensively large body of accounting, economics, and finance…show more content…
This is predicated on the assumption that Modigliani and Miller’s ideal world does not exist. Financial markets are not perfect given taxes, transaction costs, bankruptcy costs, agency costs, and uncertain inflation in the market place (Abor and Bokpin 2010). According to Bierman and Hass (1983), managers usually address the dividend payout level in the context of forecasting the firm’s sources and use of funds (Abor and Bokpin 2010). Considering future investment opportunities and the internal cash generation potential of the firm, both capital structure and dividend policy are chosen to secure that sufficient funds are available to undertake all profitable investments without handle new equity (Black, 1976). So, one of the most important constraints of investment decision in general and capital investment expenditures in particular is dividend policy. Dividend payout policy is an important corporate issue and may be closely related to, and interacts with most of the firm's financial decisions especially capital investment…show more content…
So, Firms' managers try to utilize the internal funds to suffice their financial needs which will result in a situation in which investment and dividend decisions compete for the internal funds available with the firm. In other expression, implementing new investments would decrease the funds available within the firm for dividend payments and vice-versa. This way, dividend and investment decisions become competitive and are hence interdependent (Sanju et. al. 2011). This competition between capital investment projects and dividends for internal funds will influence firms with limited internal funds to choose between pursuing capital investments and paying dividends (Ramalingegowda et al. 2013). Thus for firms that face severe information asymmetry, their capital investments are likely to be restricted by dividend decisions. In imperfect markets, under severe information asymmetry, managers work for maximizing their personal profit and wealth. Thus, managers worth capital investment because their perquisites increase with capital investment even when the firm invests in negative net present value (NPV) investments (René M. Stulz

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