Final answer:
The crux of dividend policy is whether to distribute profits as dividends or reinvest them for shareholders. Public and private firms make these decisions differently. Decisions affect shareholder returns through dividends or capital gains.
Step-by-step explanation:
The question revolves around the concept of dividend policy, which is a critical decision for firms regarding the allocation of profits. Specifically, it addresses the dilemma between paying out profits as dividends to shareholders or reinvesting that money back into the company. The crux of dividend policy is whether the firm should pay out money to its shareholders or take that money and invest it for shareholders.
In terms of decision-making, public and private firms may handle this process differently. For public companies, these decisions are typically made by the board of directors and are influenced by the company's financial objectives, investment opportunities, and shareholder expectations. For private firms, the decision might rest with the owners or a smaller group of investors, and can be influenced by similar factors but within a different context of privacy and often with a longer-term perspective. The decision encompasses issuing stock, paying dividends, or reinvesting profits.
Investors expect a return on their investment which can come through dividends or through capital gains when they sell their stock for a higher price than what they paid for it. Therefore, the firm's decision on whether to distribute dividends or to reinvest profits impacts the type of return shareholders can expect.