Assertion (A) : The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained in the firm. Reasoning (R) : Dividend policy of the firm has its effect on both the long term financing and the wealth of shareholders. Codes :
The question revolves around the assessment of an assertion-reasoning type statement about dividend policy in Business Finance. Let's break it down:
- Assertion (A): "The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained in the firm."
- This assertion is correct. The dividend policy of a company deals with the decision about the distribution of profits among shareholders and what should be retained for future growth. Companies typically retain some earnings to finance operations, investments, or as a reserve against future uncertainties while distributing a portion to shareholders as dividends. The balance between distributing dividends and retaining earnings is a critical aspect of a firm's financial policy.
- Reason (R): "Dividend policy of the firm has its effect on both the long-term financing and the wealth of shareholders."
- This reason is also correct. Dividend policy impacts long-term financing because retained earnings are a significant source of internal financing. By deciding how much to retain, a firm influences its capacity to finance future projects and growth directly through its earnings. At the same time, the wealth of shareholders is affected because dividends provide a direct income, and the policy can affect stock prices. A stable or increasing dividend can lead to higher stock values, benefiting shareholder wealth.
- Conclusion:
- Both Assertion (A) and Reason (R) are correct. The reason (R) effectively explains and justifies the assertion (A). The dividend policy directly influences key financial strategies and shareholder wealth, confirming that the reason provided is the correct explanation of the assertion.
Therefore, the correct answer is: (A) and (R) both are correct and (R) is the correct explanation of (A).
Important Questions from Dividend decision
Declared and paid dividend Rs. 7,00,000 is
Which of the following assumptions form the basis of the MM Hypothesis in stating irrelevance of capital structure regarding the weighted average cost of capital remaining constant?
(A) Perfect capital markets
(B) Heterogenous risk class
(C) Absence of taxes
(D) Full dividend payout
(E) Same expectation of firm's EBIT with which to evaluate the value of a firm
Choose the correct answer from the options given below
The formula \(P_0=\frac{D}{K}+\frac{\frac{R}{K}(E-D)}{K}\) (Where P0 is market price of shares, E is earning per share, D is dividend per share, R is rate of Return and K is cost of equity) for determining the dividend of the firm has been given by: :
Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R). Read the statements and choose the correct answer using the code given below.
Assertion (A): As per M-M hypothesis the value of the levered firm is equal to the value of the unlevered firm.
Reason (R): The process of arbitrage becomes applicable in such situations.
- The earning per share for Avanti corporation is Rs. 4.0. The rate of return on investments is 16 per cent and the return required by its shareholders is 12 percent. What will be the price per share as per the Walter model, if the payout ratio is 40 per cent?
