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.

Recognize the effects of operating at a target capital structure on the firm's value and WACC.

Identify the connection between operating characteristics and capital structure decisions.

Grasp how the nature of assets impacts the optimal level of debt.

Comprehend the relationship between financial leverage, break-even EBIT, and returns to shareholders.

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Definitions:

Cash Flow

The total amount of money being transferred into and out of a business, particularly concerning liquidity.

Cash Flow Statement

A financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.

Common Stock

A type of equity security that represents ownership in a corporation and entitles the holder to a claim on part of the company's profits in the form of dividends.

Financing Activities

Transactions involving long-term liabilities, stockholder's equity, and changes in short-term loans that impact a company's capital structure.