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Q: Dividend Policy ( Answered 5 out of 5 stars,   0 Comments )
Subject: Dividend Policy
Category: Business and Money > Finance
Asked by: mammabear-ga
List Price: $30.00
Posted: 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!
Subject: Re: Dividend Policy
Answered By: wonko-ga on 03 Dec 2005 14:03 PST
Rated:5 out of 5 stars
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

Source: "Class 4: Finance 2" by Hongjun Yan (November 2003)


mammabear-ga rated this answer:5 out of 5 stars
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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