I’m trying to study for my Business course and I need some help to understand this question.
hi everyone i want you to write your opinion about this topic “How does the distribution to shareholders affect the cost of capital for the firm?”
Discuss in three separate threads: Cash Dividend, Stock Dividend, and Share Repurchases.
you have to write your won ideas 450 word
and then respons to comments
this is the first response
The effect of dividend on the cost of capital for the firm changes depending on the type of dividend a company pays. When a company pays a cash dividend – which is the distribution of funds or money paid to shareholders generally as part of the firm’s current earnings or accumulated profit – the company pays each shareholder a specific dollar amount according to the number of shares they already own. Accordingly, the firm’s shareholders’ equity is decreased by the total value of all dividends paid. Breaking it down, retained earnings as part of shareholders’ equity will decrease, current liabilities such as dividends payable will decrease, and current assets such as cash will also decrease, all reduced by the total value of the dividends. As retained earnings decrease, the cost of capital decreases, and therefore to bring the cost of capital down, a firm would thus have to increase its equity by using more of its retained earnings to pay cash dividends.
Dividends are payments made to stockholders from a firm’s earnings, whether those earnings were generated in the current period or in previous periods. Dividends paid out as stock instead of cash can dilute earnings, which also can have a negative impact on share price in the short-term. A stock dividend is when a firm pays their shareholders additional shares in the company instead of cash (cash dividends). Before issuing dividends, firms have to declare a dividend value and when they’ll be paid out. After the declaration, the stock price will probably increase. Because a stock dividend increases the number of shares outstanding while the value of the company remains stable, it dilutes the book value per common share, and the stock price is reduced accordingly.
let me know if you have any qustion