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Greetings Tutor.
I hope you are doing well, can you please help me with the following 2 Dividend policy questions.1) Whether the following statement is true or false.
The traditional school of thought concerning dividend policy implies that managers should adopt as high a dividend policy as possible.Ans- True. (But Kaplan Study Text does not provides any explanation).
Here I wanted to ask that if manager adopts a high dividend policy it would increase investors expectations for a higher dividend in future?. So effectively the manager should have a reasonable instead of high dividend policy.
In addition there is also clientele effect, is in case company has high income tax bracket investors they would prefer a low dividend policy. Therefore the statement is False?2) Considering Dividend Irrelevance theory, can we say an Investor has only two major functions (i.e. Investing Decision and Financing Decision) with Dividend Decision being ignored.
(Asking strictly from a Dividend Irrelevance theory)The traditional school of thought regarding dividend policy does suggest that managers should adopt as high a dividend policy as possible. However, this can lead to increased expectations for future dividends from investors, which may not be sustainable.
Therefore, a reasonable dividend policy might be more appropriate to manage these expectations effectively.Regarding the clientele effect, it is true that investors in higher income tax brackets may prefer a lower dividend policy to minimise their tax liabilities.
This consideration can indeed make the statement about adopting a high dividend policy more complex, suggesting that a one-size-fits-all approach may not be suitable. Thus, your reasoning is valid.According to the Dividend Irrelevance Theory, investors are indifferent between dividends and capital gains, meaning that the dividend decision does not affect the overall value of the firm. Therefore, it can be argued that an investor’s major functions are primarily focused on investing and financing decisions, with the dividend decision being less significant or ignored in this context.
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