A company’s capital structure is made up of long-term funding sources, including different types of bonds and stocks. Dividend policy decisions can affect a company’s capital structure, as increased dividends can cause shareholders to buy more shares from the company. However, increasing dividends reduces the amount of money financing the company’s financial structure, so financial managers must seek to strike a balance between capital structure and dividend policy.
A company’s capital structure is the combination of long-term funding sources that provide the organization with income. Every company has a different capital structure, but common elements of the structures include different types of bonds and stocks. Most stock pays dividends, and higher dividend payments often cause the company to sell more stock, increasing funding in the capital structure. This is the superficial relationship between capital structure and dividend policy.
Corporate shares are shares owned by the company that are bought by investors. Stocks often pay regular dividends, which are returns on your initial investment. Common stock is publicly issued stock, with dividends usually based on the financial health of the company. Preferred stock can be offered privately and have dividends that pay at fixed rates. Dividend policy decisions have far-reaching consequences that often affect a company’s capital structure.
Shareholders and investing companies have a common goal of increasing wealth. Stockholders can make money from shares in only two ways, by paying dividends or by selling their shares to other investors. Trading shares to other shareholders comes naturally to the company: it neither makes nor loses any money from the trade. A shareholder will sell shares if the price goes down or if he thinks the price will go down. Ill financial health, the perception of a tax bust, and the possibility of reduced dividends are all reasons for falling stock prices.
Of the two ways shareholders make money on stock, dividend payments have the greatest potential to boost the company’s funds. This is because increased dividends can cause shareholders to buy more shares from the company instead of trading the shares on the market. The connection between capital structure and dividend policy becomes more complex because increasing dividends reduces the amount of money financing the company’s financial structure. A company’s CFO probably won’t risk increasing dividend payments unless he expects the company to be able to increase stock sales than it has spent on dividends.
The main goal of most companies is to maximize shareholder value to maintain an influx of investment money. Paying dividends may temporarily appease shareholders, but the expense could reduce the amount of money available for capital and operating expenses. This means that corporate financial managers must seek to strike a balance between capital structure and dividend policy. Dividend-raising spending has the potential to both increase and decrease the amount of funding in the company’s financial structure.
Smart Asset.
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