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sir I also had another doubt:
” the following should be considered by a company when forming a dividend policy:
– optimal gearing position- paying a large dividend reduces the value of equity in the firm, so can help a firm move towards its optimal gearing position”
i understand that if dividends are paid out using internal accruals (like retained earnings) or reserves then cash in the company available for future projects depletes this irks some investors causing the value of shares to tumble, but then i do not understand the part about how it helps a firm move towards optimal gearing.
Dividends can only be paid out of retained earnings.
Nobody is saying that this will always help achieve optimal gearing. It is simply that if higher gearing is better for the company then one way of achieving higher gearing will be to reduce the market value of the shares by paying a higher dividend.
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