What Is the Connection Between Capital Structure and Dividend Policy?

Dividend policy The policies and strategies involved mainly involve the company's strategy of distributing or retaining its earnings for reinvestment.

Dividend policy

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Dividend policy The policies and strategies involved mainly involve the company's strategy of distributing or retaining its earnings for reinvestment.
Chinese name
Dividend policy
Foreign name
Dividend policy
Use
investment
Residual Dividend Policy
The dividend policy is based on meeting the company's capital needs first. Under this policy, the company determines its dividend distribution amount as follows:
Determine the best capital structure for the company;
Determine the company's funding requirements for the next year;
· Determine the amount of shareholder equity required to meet capital needs in accordance with the optimal capital structure;
· The company's after-tax profit will first meet the company's increased demand for the next year, and the remaining part will be used to pay out cash dividends for the year.
Stable Dividend Policy
The determined cash dividend distribution amount is given priority consideration as the primary goal of profit distribution, and generally does not fluctuate with the fluctuation of capital demand. This dividend policy has two advantages.
Stable dividends give the stock market and company shareholders a stable message.
· Many shareholders (including individual investors and institutional investors) as long-term investors hope that the company's dividends can become a stable source of income "in order to arrange consumption and various other expenses. Investor's investment.
Adopting a stable dividend policy requires the company to make a better judgment on its future payment capacity. Generally speaking, the amount of stable dividends determined by the company should not be too high, and there should be room to avoid the dilemma of the company's inability to pay.
Fixed-share interest rate policy
This policy requires companies to pay a cash dividend from their after-tax profits at a fixed rate each year. From the perspective of the company's ability to pay, this is a truly stable dividend policy.) However, this policy will cause frequent changes in the company's dividend distribution and pass information to an outside company that is unstable. Dividend policy.
Normal dividend plus additional dividend policy
According to this policy, in addition to paying a fixed dividend amount to shareholders every year as a normal cash dividend, the company also distributes higher-than-normal cash dividends to shareholders in years with higher corporate profits and more abundant funds dividend. The higher part is the additional dividend.
The main factors affecting the company's dividend distribution policy are the following:
Various constraints
· Contract constraints
When a company borrows long-term debt, the debt contract usually has certain restrictions on the company's distribution of cash dividends. The company's dividend policy must meet the constraints of such contracts.
Legally binding. In order to protect the interests of all parties concerned, the laws of each country regulate the company's profit distribution order, capital adequacy and other aspects, and the company's dividend policy must comply with these laws and regulations.
· Cash adequacy constraints
The company must have sufficient cash to issue cash dividends. If the company does not have sufficient cash, the amount of cash dividends it must pay is bound to be limited.
Company investment opportunities
If the company has a lot of investment opportunities and a large demand for funds, the company is likely to consider finding less gold dividends and using more profits for investment and development. On the contrary, if the company has few investment opportunities and small capital requirements, Then the company may pay more cash dividends. Therefore, when the company determines its dividend policy, it needs to make a better analysis and judgment of its future development trends and investment opportunities as one of the basis for formulating a dividend policy.
Cost of capital
A company limited by shares shall maintain a relatively reasonable capital structure and capital cost. When the company determines the dividend policy, it should fully consider the amount of funding sources and the cost of each funding channel, so that the dividend policy is consistent with the company's ideal capital structure.
Solvency
Debt solvency is a basic factor to be considered when a company determines its dividend policy. Dividend distribution is a cash expenditure, and a large amount of cash expenditure will inevitably affect the company's ability to pay its debts. Therefore, when determining the amount of dividend distribution, the company must consider the impact of cash dividend distribution on public solvency, and ensure that after the cash dividend distribution, the company can maintain a strong solvency to maintain the company's creditworthiness and borrowing capacity .
Information transfer
Dividend distribution is an important message about the company's financial status and future prospects that the company shares to the outside world. In determining the dividend policy, the company must consider the possible external reaction to this policy.
Control of the company
If the company's shareholders and managers value the original shareholders' control over the company, the company may be reluctant to issue new shares and instead make greater use of the company's internal accumulation. Such companies would have lower cash dividend distributions.

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