Question

The crux of dividend policy is whether the firm should pay out money to its shareholders or take that money and _______

A.fund nonprofit organizations
B.pay it out to executives
C.engage in excess perquisite consumption
D.invest it for shareholders

Answer 1

The crux of dividend policy is the choice between distributing profits as dividends to shareholders or reinvesting them in the firm. Decision-making authority varies between private and public companies. The expected rate of return for investors can come from dividends or capital gains.

Correct option is D.

Step-by-step explanation:

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.

Private and public companies make decisions on whether to issue stock, or pay dividends, or reinvest profits differently.

For instance, the management and board of directors typically make these decisions in public companies, while in private companies, the decisions may lie with the owners or private investors.

When a firm decides to issue stock, it is bound by the expectation that investors will require a rate of return.

This rate of return can be provided directly through dividends or indirectly through capital gains, which is the increase in the stock value between the purchase and the sale of the share.

Therefore, a financial investor might experience capital gains by purchasing a share at a lower price and selling it at a higher price later on.

Correct option is D.

Answer 2

The crux of dividend policy revolves around whether to distribute profits as dividends to shareholders or reinvest them into the firm, impacting returns via dividends or capital gains. This decision can influence a company's capital structure and is made differently by private and public firms.

Step-by-step explanation:

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. Decisions about when a firm will issue stock, pay dividends, or reinvest profits are critical for a company's financial strategy. It is pertinent to distinguish between private and public firms when considering these choices. Private companies may have a concentrated group of shareholders who make these decisions, such as a founding family or a private equity firm. In contrast, public companies have dispersed shareholders, and the decisions are typically made by the company's board of directors, based on recommendations from management.

Investors expect a rate of return, which can come in two forms: direct payments called dividends, or capital gains, which are the increase in stock value between purchase and sale. A balanced dividend policy is crucial because while dividends provide immediate return to shareholders, reinvesting profits can lead to growth and potentially higher stock prices in the future. These decisions significantly affect the company's capital structure, market perception, and shareholder satisfaction.