Final answer:
Deciding whether to decrease a company's dividend from $0.75 to $0.60 requires analysis of financial stability, investment needs, and shareholder expectations. Investors use expected dividends to value a stock, factoring in the present value of future payouts. The example of Babble, Inc., illustrates that a share's price will include anticipated dividend payments, present value calculations, and investor sentiment.
Step-by-step explanation:
Whether a company should decrease its dividend from $0.75 per share to $0.60 per share depends on various factors, including the company's financial health, future investment plans, and market expectations. A dividend is a share of the profits paid to shareholders and signals the company's financial stability and profitability. Stable companies, like Coca-Cola and electric companies, often provide dividends and are held by investors for extended periods due to the consistent return they offer.
In the hypothetical scenario of Babble, Inc., the company plans to pay out all profits as dividends which will be disbanded in two years. Given the expected profits of $15 million, $20 million, and $25 million over the next two years and splitting this amount equally among the 200 shares of stock, investors would likely consider the total dividends to be paid when determining what they are willing to pay for a share. If we assume all profits are distributed evenly, each share would receive $75,000 over two years. However, an investor would also consider the present value of these future payments when deciding the price they're willing to pay for a share today.
Looking at other situations, such as a firm's decision to shutdown if the price falls below minimum average variable cost, or fluctuations in stock prices after a price increase, as was the case with Netflix, demonstrates the complex nature of dividend policies and stock valuation.