In An Attempt To Raise Additional Capital To Finance A Major

In an attempt to raise additional capital to finance a major expansion

In an attempt to raise additional capital to finance a major expansion, Axetem, Inc. is creating a steering committee to help devise an improved dividend policy to help attract more stock investors. You have been chosen as one of the participants in the steering committee. During the committee’s initial meeting, you discussed how the "clientele effect" should receive a major consideration in devising an effective dividend policy for Axetem. You also discussed other factors that can also influence a company’s dividend policy. Following your meeting, one of the members of the steering committee e-mails you with some follow-up questions.

Write 1–2 pages that respond to the following in response to her e-mail: What is the purpose of a dividend policy? What 3 factors influence the direction of a dividend policy? How does the implementation of or changes to a dividend policy usually affect stock prices? What recommendations can you provide moving forward?

Paper For Above instruction

The purpose of a dividend policy is to establish how a company distributes its earnings to shareholders in the form of dividends. The policy serves as a strategic tool that balances the interests of investors seeking income with the company’s need to reinvest earnings for growth and expansion. An effective dividend policy can enhance shareholder confidence, signal the company's financial health, and influence investor perceptions about future prospects. It can also help stabilize stock prices by providing predictable income streams, especially valuable for income-focused investors.

Several factors influence the direction of a company’s dividend policy. The first is the company's profitability and cash flow position; consistent profits and ample cash flows provide the financial capacity to pay dividends and influence the dividend payout ratio. The second factor is the company's growth prospects and reinvestment opportunities; high-growth firms often retain earnings to fund expansion projects, resulting in lower dividend payouts. Conversely, mature companies with fewer growth opportunities may prioritize dividend payments to attract and retain income-oriented investors. The third factor is the legal and contractual constraints, such as debt covenants or regulatory restrictions, which may limit the company's ability to pay dividends or require certain levels of retained earnings.

Implementation or changes to a dividend policy can significantly impact stock prices. An increase in dividends often signals the company's confidence in its future earnings, potentially leading to an increase in stock price. Conversely, a reduction or suspension of dividends might be perceived negatively, suggesting financial difficulties or a strategic shift toward reinvestment, which could lead to a decline in stock value. However, in some cases, changing dividend policy to retain earnings for growth can boost long-term stock value. The market's perception of these changes depends on investor expectations, the reasons behind the adjustments, and the company's overall financial health.

Moving forward, I recommend that Axetem adopt a flexible dividend policy aligned with its growth objectives and shareholder preferences. Emphasizing transparency and communication with investors about the reasoning behind dividend decisions can help mitigate negative reactions to policy changes. The company should also consider establishing a target payout ratio that reflects its earnings stability and growth outlook, ensuring a balance between rewarding shareholders and reinvesting for expansion. Additionally, engaging with investor clientele to understand their dividend preferences can help tailor the policy to attract the desired investor base, ultimately supporting the company's capital raising efforts for its expansion plans.

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.
• Damodaran, A. (2012). Investment Valuation: tools and techniques for determining the value of any asset (3rd ed.). Wiley.
• Fama, E. F., & French, K. R. (2001). Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3-43.
• Litzenberger, R. H., & Ramaswamy, K. (1979). The effect of personal taxes and dividends on capital asset prices: Theory and empirical evidence. Journal of Financial Economics, 7(3), 163–195.
• Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and taxes. American Economic Review, 46(2), 97-113.
• Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411-433.
• Statman, M. (1987). How many dividends? The Journal of Portfolio Management, 13(3), 36–43.
• Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783.
• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.