The paper "Dividend Payout Theories and Policies on Capital Structure" is an outstanding example of finance and accounting coursework. A more profitable company identifies all the outstanding projects that the company should not miss. Dividend payout is the earnings that are paid to the stockholders. They are paid in the form of a dividend on the net income or capital of the given company. However, the rest of the money that is not issued to the investors is ploughed back to the firm as retained earnings (Brealey, Myers & Allen, 2017).
The investors will seek to invest in a company that may have high dividend payout ratios. The higher the dividend ratio, the higher the growth of the company. The dividend payout ratio is given by the following formulae dividends per share out of earnings per share which break down to (dividends- preference share dividend)/ net income. Obviously, the dividend payout ratio measures and ascertains the percentage of the net income that the ordinary shareholders get in a given year. The decision of paying dividends is relevant to a firm since most of the investors will plough the capital in the form of shares in a company that has a steady and constant cash flows and high dividends. In the light of pecking order theory which states that the cost of financing in any given entity or business increases as there is information asymmetry (Hiller, Westerfield, Jaffe & Jordan, 2013).
Bearing in mind that a good financial mix uses the debt capital in its structure, it shows that the capital structure is altered since most of the funds used under this model are internal.
The internal funding is mostly from the retained cash or shares from investors. With the knowledge that this theory tries to prioritize the sources of capital. Pecking order theory is best when one is investing in intangible assets such as the shares. Thus, the firm should adhere to the pecking order theory of the capital structure to ensure that the decisions made are profitable to the entity. The theory explains more on the relationship between the debt and profitability which is inverse in nature. It is because the most preferred financial mix is from internal funding.
To avoid such sudden changes, the dividend payout is targeted and adapted (Miglo, 2011, p. 1-27). Pecking theory has the implications that the debt is favored over the equity funding in such that small-sized company are on capital dominance and large companies on the issuance of debentures and shares at IPO If the entities issues are advertised, it generates weaker market reactions (Antweiler, Werner & Murray, 2006). It affects the dividend payout ratio and the profits of a given investment. In a nutshell, the dividends explained in various theories according to their relevance in a company.
The dividends are vital in any wealth maximizing firm since there must be a good balance in dividends and retained earnings. Thus, at a certain point, the dividends are relevant to a firm according to relevant dividend theory. By having an optimal payout ratio is best since it gives a high MPS. Good payout policy is best for investors. The policy seeks out to answer all the decisions about this. If we are rewarding the shareholders what is the best method of reward in the ultimate goal due to maximizing the wealth of the shareholders (Lumby & Jones, 2015).
These are the guidelines that a company uses to make its decisions against a portfolio of equities. There are two theories that explain the dividend payout policy, dividend irrelevance theory, and Dividend relevance theory.