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optimal gearing position

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › optimal gearing position

  • This topic has 1 reply, 2 voices, and was last updated 2 years ago by John Moffat.
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  • December 16, 2020 at 11:48 pm #600154
    Noah098
    Member
    • Topics: 935
    • Replies: 352
    • ☆☆☆☆☆

    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.

    December 17, 2020 at 9:09 am #600174
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    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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