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Just for confirmation, because there isn’t any word for Dividend capacity in the AFM lecture notes.
Can we say that Dividend capacity and Free cash flow to equity is one and the same thing?
I ask you this in relation to Cadnam Question (SD2019), requirement (a).
Thanks in advance!
Dropping my understanding here because I am not sure if I am correct or not as well!
I think dividend capacity will be the amount that is available to be distributed as dividends to the shareholders.
Considering retained earnings (bal sheet) = whatever left after distributing dividends, I assumed dividend capacity to be ‘net profit of the year’ – dividends paid to shareholders = retained earnings
I think if they mentioned requiring to maintain a certain PE ratio/EPS, then we have to take into account that as well when calculating the dividend capacity.
Not sure if I am correct or not though, haha
The dividend capacity is the amount of cash available for shareholders. That is not to do with the retained earnings because just because there are retained earnings does not mean there is the cash available.
It is more of a financial accounting exercise that financial management 🙂So, Dividend capacity is something very close to Free cash flow to equity, because we also deduct capital expenditures to reach the amount available for shareholders?
Dear sir,
Does it not mean that the net profit of the year = the amount that is available to distribute dividends to the share holders?
After distributing the dividends, the remaining amount goes into the retained earnings in bal sheet.In that case, doesn’t dividend capacity = net profit of the year?
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