Heads-Up17: Dividend policy

CFA Level II
#1

Generally, the higher the floatation costs:

A. The lower the dividend payout.

B. The higher the dividend payout.

C. Dividend payout not affected.

#2

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

#3

hence the heads up.

#4

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

#5

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
#6

That’s it.

#7

so answer is B

#8

B. The higher the dividend payout.

Why B? It is A.