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Dividend Policy at Fpl

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Nithin Geereddy 80842082 Corporate Finance Tuesday Section
Dividend Policy at FPL Group, Inc Case

Q1) Why do firms pay dividends? What, in general, are the advantages and disadvantages of paying cash dividends?

Ans:

The purpose of dividend payouts is to return wealth back to the company shareholders instead of using it for operations. Dividends provide investors with regular income from their investments and act as an incentive to continue or start investing in the company. The company’s share price will drop in relation to the dividend payout, because a company’s value has not risen, they are just allocating money differently. All dividends must be declared by the board of directors and are taxable as income to the recipients. Taking into account the many theories of dividend policy including the Dividend Irrelevance, we can conclude that firms should pay out as dividends “any cash flow that is surplus after the firm has invested in all available positive net present value projects.” In some cases, this may be a way of signaling that the company is financially stable and capable of fulfilling dividend obligations. It may also be a way for companies to mitigate agency problems when they have excess cash.

Advantages of paying cash dividends include:

* A means of distributing excess cash and lacking in investment opportunities. * Use of Dividends as signal of financial health as dividends send a signal to current and future investors that the company is financially stable. * Dividends may attract institutional investors who preferred some returns from dividends. * Stock price usually increases with the announcement of a new or increased dividends * A signal of the value

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