Category: Business and Money > Finance
Asked by: mammabear-ga
List Price: $30.00
03 Dec 2005 07:21 PST
Expires: 02 Jan 2006 07:21 PST
Question ID: 600884
I have a question to ask and I don't want just the answer. Can you please point me to where I can find this information or at least give me a good explanation so that I can understand the concepts. Can you please tell me whether I can expect these companies to distribute a relatively high or low proportion of current earnings and whether I would expect them to have a relatively high or low price-earnings ratio. 1.) A high-risk company 2.) A company that has recently experienced a temporary decline in profits. 3.) A company that expects to experience a decline in profits. 4.) A "growth" company that has valuable future investment opportunities. Thank you for your help!
Re: Dividend Policy
Answered By: wonko-ga on 03 Dec 2005 14:03 PST
High risk company: Low proportion/high PE ratio. A high risk company seeks to not have to decrease its dividend. Therefore, it will distribute less of its current earnings to allow for fluctuations in its performance. High risk companies tend to have high PE ratios because high risk typically implies the potential of a large reward. Temporary decline in profits: High proportion/low PE ratio. A firm in this situation wants to avoid decreasing its dividend if at all possible. Therefore, it will pay out more of its current earnings if it believes its situation will improve. However, its currently poor results will result in a lower PE ratio because its prospects are not as attractive. Expects decline in profits: Low proportion/low PE ratio. Again, out of a desire to avoid decreasing its dividend in the future when profits decline, the firm will pay out a low proportion. Its poor future prospects will result in a low PE ratio. Growth company: Low proportion/high PE ratio. A growing company has lots of attractive areas in which to invest, so it will choose to pay a very minimal dividend. Its attractive prospects result in a high PE ratio. Source: "Class 4: Finance 2" by Hongjun Yan (November 2003) http://phd.london.edu/hyan/teaching/class4_tutorial.ppt Sincerely, Wonko
rated this answer:
Thank you, thank you, thank you!!! Finally something that makes sense. I appreciate the link to the powerpoint presentation. If only my DL instructor offered this much instruction.
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