Dividend Policy and Capital Structure Decision Free-Samples

Questions: 1.Does Paying a Dividend Make Shareholders Any Better. 2.Comment on the relation between the leverage ratio and Profitability over the past 10 years. 3.Comment on the firms business risk, financial risk and default risk. In your opinion, should the firm increase its leverage? Answers: Introduction This is a report that explains trends in dividend policy for Telstra under different conditions or circumstances. The purpose of the report is to give answers to questions such as; does paying a dividend make a shareholder any better or worse?, what kind of dividend policy has the Forts cue adopted for the past 10 years?, how does the incident indicate a likely dividend clientele effect? And how the firms share price responded to the announcements over the past 18 months. This report answers all those questions needed to be addressed by Telstra. The capital structure for Fortes cue has also been discussed where the report analyses the relationship between leverage ratio and profitability over the past 10 years. It later looks at the various business risks that a firm can face while undertaking its core activities. (Manos, 2011) 1.Dividend Policy for Telstra What are these dividends? Dividends can be defined as a proportion of cash (always profit earned) given to shareholders of a particular company. Shareholders will always be motivated and encouraged when a company offers better dividends to them. Failure of firms to issue dividends may lead to losing of investors gradually posing a challenge of instability. It becomes difficulty for companies to grow if they fail to share part of their profits to shareholders. The dividend policy of Australia tries to protect the interests of members by ensuring that the tax system does not mistreat those who pay dividends. Paying dividend makes shareholders better off in the context of the Australian tax system. This is because of the elimination of amount of tax to be paid by an individual from his or her earnings either monthly or yearly. Dividends acts a tools to low income tax rates. Individuals who pay dividends are not subjected to greater tax rates on their total earnings. This explains clearl y why the Australian tax system favors payment of dividends by shareholders. The Australian government has implemented dividend imputation system which gives offers on tax payable to members. Such activities are aimed at eliminating heavy imposition of tax by business entities to its shareholders. Citizens of Australia should be encouraged to pay dividends due to its positive impacts attached to it. There will be a good balance in the manner of which taxation is carried out by companies to members. Shareholders enjoy low rates of taxation on their income which makes them better. The people who support relevance of dividends clearly state that, regular dividends reduce uncertainty of the shareholders by a given percentage (Manos, 2013). What are these dividends? Dividends can be defined as a proportion of cash (always profit earned) given to shareholders of a particular company. Shareholders will always be motivated and encouraged when a company offers better dividends to them. Failure of firms to issue dividends may lead to losing of investors gradually posing a challenge of instability. It becomes difficulty for companies to grow if they fail to share part of their profits to shareholders. The dividend policy of Australia tries to protect the interests of members by ensuring that the tax system does not mistreat those who pay dividends. Paying dividend makes shareholders better off in the context of the Australian tax system. This is because of the elimination of amount of tax to be paid by an individual from his or her earnings either monthly or yearly. Dividends acts a tools to low income tax rates. Individuals who pay dividends are not subjected to greater tax rates on their total earnings. This explains clearl y why the Australian tax system favors payment of dividends by shareholders. The Australian government has implemented dividend imputation system which gives offers on tax payable to members. Such activities are aimed at eliminating heavy imposition of tax by business entities to its shareholders. Citizens of Australia should be encouraged to pay dividends due to its positive impacts attached to it. There will be a good balance in the manner of which taxation is carried out by companies to members. Shareholders enjoy low rates of taxation on their income which makes them better. The people who support relevance of dividends clearly state that, regular dividends reduce uncertainty of the shareholders by a given percentage (Akhtar, 2007). The clientele effect refers to a theory which tries to explain how a company`s stock price will move according to the demands and objectives of investors in reaction to changes in various factors. These factors are tax, dividend or another policy variation. In the Telstra firm, that incident indicates there is a likely dividend clientele effect. The policy of a company will tend to have a greater influence on interested parties who wish to invest in the company. Some may differ with the profit rates and be reluctant to invest while some may accept the company policy and invest fully. Generally, we can conclude that policy of a company determines a lot on the number of clienteles. It is hence true to say that, there is a likely dividend clientele effect since in Telstra firm the shareholder, the Telco- giant seem to defer taxes on dividends not paid out. At times clienteles prefer to invest in short term basis than long term. This is a usually used by those investors who are still loo king for cash in order to be stable. Rich clienteles have a preference of long term to short run due to their stable nature when it comes to capital. The investors who prefer putting their cash into running activities always do away with long term investments but re-invest back when financially stable. Once the dividend policy has been implemented by a company, further changes are not done on it. (Al-Najjar, 2008) sponded by falling to a five-year low as investors react to the announcement that the Telco-giant will reduce its dividends this financial year, of which it is relevant of dividend payout policy because it may be the guidelines that the firm uses. As discussed earlier, dividend policy is simply a structure or procedure thats assists business firms in issuing out of profits got after investment to the prospective members. (Palepu, 2007) 2.Capital Structure for Fortescue The share price has contributed to the capital structure decisions vastly. Share price leads to an increase in the level of rates implemented on peoples earnings. Such occurrences lead to debts which may even be difficult to pay back by individuals. It even discourages business people from investing in certain activities due to high share price. This is in consistent with empirical evidence in the field whereby Fortes cue Metal Group, an Australian iron ore miner based in the Pilbara region of W.A tended to attract an investor. (Yensu, 2014) To begin with, lets understand what a leverage ratio is, leverage ratio refers to any one of several financial measurements that look at how much capital comes .furthermore, he or she identifies the measurements in different aspects. This ratio assists a firm to be able to know whether it will meet its expenses or not. It is therefore important for any company to use leverage ratio in order to get a better prediction of its future unforeseen returns on investments..In this case, the higher the leverage ratio the higher the profit earned. This is evident when Fortes cue Metal Group is able through the leverage ratio to mine and 97% of exported iron ore is sold to the Chinese market. The capital structure is adversely affected by high leverage ratio. Some of this effect can even lead to closer of companies due to inability to meet its operations like repayment of loans borrowed. In this case, the Fortes cue Metal Group balances the costs and benefits and that is why is able to mine an export ore and at the same time earn profit too. (Tang, 2012) 3.Comment on the firms business risk, financial risk and default risk It is important to first understand the meaning of a risk. In business, a risk can be said to be a situation that leads to firms making losses instead of gaining profits. When a business man gets a smaller output than input then that can be said to be a risk. All entrepreneurs face risk challenges and the only way of handling them is being risk takers. (Dhillon, 2013) Business risk Business risks come in when a company encounter losses. Consequently, it can also arise in situations when the firm does not hit the target profit intended to be achieved. It is influenced by many factors. Among the key ones are competition between entities, regulations imposed by the government, input costs, and the overall economic climate among many other factors. There are various types of business risks that can be faced by firms. Government regulations arising from institutions of law fall under business risks. The Forts cue Metal Group firm is facing completion from BHP Billion Limited among other firms and therefore Forts cue Metal Group may experience in terms market availability especially when the competitor has enough capital or even offer continuous supply as compared to Forts cue Metal Group. The Forts cue Metal Group may also suffer a risk through the government regulations. A good example is when it imposes high tax on the firm. It makes the firms profit be compromise d or when it regulates the amount of ore to be exported, its profit may also be reduced and be lower than the expected one. (Fan, 2013) Financial risk This is a risk that mostly affects shareholders of a given company. It comes out clearly in situations where the company is operating on loss basis. This will therefore imply that it will not be in a position meet the expectations of its investors. When business people get money from companies and fail to return back, this will be treated as an example of a financial risk. In this case, Forts cue Metal group firm might be at a financial risk. This can be realized when it exports the ore to the Chinese market on credit and they delay to pay. Doing business internationally also increases the financial risk since the exchange rates of revenue fluctuate. This is a big financial risk to be taken into account and addressed critically by the relevant business firms. (Bhat, 2008) Default risk This is a risk faced by lending institutions mostly companies. When its members or shareholders are given money with expectations of them returning back and later fail to meet the expectations, it will be referred to as a default risk. Most of the banking entities always impose penalties on those who default. This is the only way of recovering from losses. In this case, the Forts cue Metal Group may be at a default risk. This is clearly brought about when they export the ore to the Chinese market and the creditor becomes unwilling to pay. Similarly, the firm may also face default risk if it has got high leverage. This may cause the firm not to be in a good position to pay the debt within the agreed period of time and hence leading to default risk. Default risk can also occur when the firm did not successfully implement a business plan. Failure to do so will always delay in paying the debts and hence default risk is experienced by the firm in the long run. Inadequate cash flow to serv ice debt also results into a default risk. When the surplus of a given company is higher, then this is a clear indication of a good cash flow. Companies would always strive to come up with an increasing cash flow in order to meet the debts available. Therefore a declining cash flow in a firm may result to its uncertainty in paying of the debts and hence face the default risk. Declining liquidity may also results into a default risk. In this case, the Forts cue Metal Group firm may not have enough cash flow to cover the expenses. (Megginson, 2008) Opinion if the firm should increase leverage What is increased leverage? This is an activity where a business firm gets cash from other lending entities in order to increase their stock. The main aim is to get better returns at the end of their activities increased leverage has both the advantages and the disadvantages. Some of the advantages of increased leverage include; firstly, it makes business people to be able to produce large goods and services. This is enabled through enough cash got from companies through loans. It becomes more effective when carrying various activities as it leads to higher returns. There is also additional cash in hand by companies when they are in a position to get loans. Funding of key activities becomes easier before looking at the future outcomes. A firm will be able to concentrate on investments due to the available cash at hand. Therefore in my opinion, the firm should not increase its leverage. This is because of the disadvantages attached to the increased leverage. The disadvantages likely t o be experienced include; first and foremost, increased leverage is more costly whereby the firm will be required to pay higher interest rates. In this case, the forts cue Metal Group firm if they increase the leverage, then they have to pay more interest which is a big cost and in turn more risky to the firm. In the case of Forts cue Metal Group firm, increased leverage leads to its financial risk mainly because of the increased interest that comes with it. Secondly, significant increase in leverage leads to decline in outputs. Firms will not be in a position to make good returns since they invest more but get fewer outcomes. (Taranto, 2011) Recommendation After doing an effective research under the various answers that needed to be discussed, it is recommended that Telstra should be in a position to give a dividend to its shareholders. Issuing of dividends prevents a member from being taxed twice. Forts cue metal group firm should be able to consider risks involved in its business activities before increasing leverage. This is because the action results in both advantages and disadvantages in the long run. Conclusion Generally, paying a dividend to shareholders has a positive impact as it makes members better as discussed in the dividend policy of Telstra. Financial, business and default risks are some of the challenges that can face any business firm. Some of these business risks are costly and can really affect the prosperity of a business. Firms need to critical look at the discussed examples and avoid them using all means available for the success of their business. References Akhtar, S. (2007). 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