The capital structure of a company is made up of long-term funding sources, including bonds and stocks. Dividend policy decisions affect a company’s capital structure, and increasing dividends may cause shareholders to buy more shares, but it also reduces the amount of cash available for financing. Financial managers must balance capital structure and dividend policy to maximize shareholder value.
The capital structure of a company is the combination of long-term funding sources that provide income to the organization. Every business has a different capital structure, but common elements of the structures include different types of bonds and stocks. Most stocks pay dividends, and dividends that pay more often cause the company to sell more shares, which increases funding in the capital structure. This is the superficial relationship between capital structure and dividend policy.
Corporate shares are shares owned by the company bought by investors. Stocks often pay regular dividends, which are returns on your initial investment. Common shares are shares issued to the public, with dividends generally based on the financial health of the company. Preferred shares can be offered privately and have dividends that pay at set rates. Dividend policy decisions have far-reaching consequences that often affect a company’s capital structure.
Shareholders investors and companies have the common goal of increasing wealth. Shareholders can only make money from shares in two ways, either through dividend payments or by selling their shares to other investors. Trading shares with other shareholders is natural to business: you don’t make or lose money from the trade. A shareholder will sell shares if the price goes down or if he thinks the price will go down. Poor financial health, perceived fiscal failure, and the possibility of reduced dividends are all reasons why stock prices fall.
Of the two ways that shareholders make money from stocks, dividend payments have the greatest potential to increase company funds. This is because increased dividends may cause shareholders to buy more shares of the business rather than trade the shares on the market. The connection between capital structure and dividend policy becomes more complex because increasing dividends reduces the amount of cash that finances the company’s financial structure. A company’s financial manager probably won’t risk increasing dividend payments unless he expects the company to be able to raise more on stock sales than it spent on dividends.
The primary goal of most corporations is to maximize shareholder value in order to maintain an investment cash inflow. Paying dividends may temporarily appease shareholders, but the expense could decrease the amount of cash available for capital and operating expenses. This means that corporate financial managers must try to strike a balance between capital structure and dividend policy. Spending on higher dividends has the potential to increase and decrease the amount of funds in the company’s financial structure.
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