There Are Three Practical Considerations in Selecting a Firm's Dividend

question 56

Essay

There are three practical considerations in selecting a firm's dividend policy: restrictions on legal capital,restrictive bondholder covenants,and constraints on cash availability.Define and discuss each of these items and the impact of each on the formulation of a firm's dividend policy.

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Definitions:

Market Values

The market's going price for acquiring or selling a service or asset now.

Book Value

The net value of a company's assets minus its liabilities, often used to assess if a stock is under- or overvalued.

Cost of Equity Financing

The return that investors require for providing capital through the purchase of shares, often considered as a company's cost of raising new equity.

Dividend Growth Model

A valuation model that projects the value of a stock or company based on the theory that its value is determined by the present value of its future dividends, which are assumed to grow at a constant rate.