Introduction and problem definitionThe level of debt and dividend policy which affect the financial gearing influences greatly the value of a firm. This financial aspect of a company floated in country with a stock exchange that is undervalued provides a deeper understanding of debt and dividend policy in regard to the value of a firm. Capital structure consist of both debt and equity capital. The apt combination of equity and debt capital brings about the required standards that are needed for financing, operating and investing activities within the business organization. The combination of debt and equity gives investors, governments, and lenders a quick glance of the financial strength of the firm and whether the firm is in a position to meet its financial objectives.
Shareholders value is what is delivered to shareholders due to the ability of management to grow share price, dividends, and earnings (Feldstein & Green, 2002, p. 33-9). The shareholders value in the summary of all strategic decisions that has an impact on the ability of the firm to increase efficiently the amount of cash flow in the firm over a period of time.
This paper examines the implications of dividends policy and debt level on the value of a firm through analyzing different theories and concepts. The effects dividend policy and debt level to a firm operating in a country where stock exchange is underdeveloped has been highlighted. Implication debt level and dividend policyIt has been established that various research studies that dividend policy can make significant effect on corporate future value when implemented and followed carefully. The objective of wealth maximization is prevalently accepted objective of business since it reconciles the various and usually conflicting stakeholders’ interest.
The fascination of shareholders value is gaining popularity due to several advancements that include: The corporate takeover threat by those looking for undermanaged and undervalued assets. Impressive endorsement through corporate leaders who use the approachThe escalating acknowledgement that traditional accounting parameters such as ROI and EPS do not have reliable link the value of shares of the firm. An escalating acknowledgement that long-term compensation needs to be tightly close to returns to shareholders. Reporting of shareholders’ returns together with other performance measures in business press. Debt forms an important combination of the capital structure of the firm that makes it realize the objective of funding financing activities.
Debt has the following features: Commitment of making fixed payment in the future. The fixed payment are applicable to tax deductionInability to make the payment can lead to default or losing control of the company to the lenders. Consequently debt should include the interest bearing debt both short term and long term, the PV of operation of lease commitments (Chew & Donald, 2001, p. 131). Debt level in the company is used by investors to gauge the financial strength of through its ability to clear outstanding debts.
When the level of debt is too high, investors are skeptical about the future of such a firm since in ability of the company to pay debt can lead to it being taken over by the lenders or its property being auctioned to clear the debt.