Heads-Up17: Dividend policy

Generally, the higher the floatation costs:

A. The lower the dividend payout.

B. The higher the dividend payout.

C. Dividend payout not affected.

cannot think of a relation between the two, are there any?

hence the heads up.

Higher floatation cost => external equity is expensive => use more of internally generated funds because they are the cheapest source of finance for a company (i.e. more of the earnings are retained and lesser dividends paid) => Low Dividend payout ratio

LOS 30d Explain factors that affect dividend policy

  1. Investment Opportunities
  2. Expected volatility of future earnings
  3. Financial Flexibility
  4. Tax considerations
  5. Flotation costs - higher float cost = lower dividend payout
  6. Contract and legal restrictions

That’s it.

so answer is B

B. The higher the dividend payout.

Why B? It is A.