Question

Using the dividend growth model, explain why a firm would be hesitant to reduce the growth rate of its dividends.

Answer 1

Answer:

A firm would be hesitant to reduce the growth rate of its dividends because as you reduce the growth rate the price of the firms stock and dividends would decrease. ... Valuing a share of common stock is using present value of all expected future dividends.

Answer 2

Answer:

A firm would be hesitant to reduce the growth rate of its dividends due to financial trouble, unexpected expenses, funding growth, and prefer deferred dividends.

Explanation:

• The dividend growth model has the benefit of offering a straightforward approach to assessing a stock's fundamental worth.
• Investors can contrast the prices of stocks issued by businesses in various industries.
• As a means of rewarding investors for their investment, many corporations offer dividends.
• However, some businesses decide to save their profits to finance future expansion prospects.
• In response to financial difficulties or unanticipated high expenses, businesses may sometimes delay their normal dividend payments.

Reason 1: Money problems

• A dividend suspension is typically brought on by the issuing company's financial difficulties.
• Because dividends are paid to shareholders from retained earnings, a struggling business may decide to stop paying dividends to its cash reserves for future costs.

Reason 2: Unanticipated Costs

• Unexpected one-time expenses that momentarily lower profitability are yet another factor that could cause a corporation to postpone dividend payments.
• Even if revenues remain consistent from year to year, the business may need to use its profits for other things if it loses a lawsuit or has to replace or upgrade expensive equipment.

Reason 3: Growth Financing

• Dividends are paid from a company's retained earnings, or the total amount of profit accrued over time that has not yet been dispersed as dividends or otherwise depleted.

Reason 4: To postpone preferred dividends

• There are two different types of stock that a corporation can issue, which makes dividend distributions a little more complicated.
• The majority of stock is regarded as common stock, and the issuing corporation decides whether to pay dividends.

Hence, financial trouble, unexpected expenses, funding growth, and prefer deferred dividends will lead the firm from being hesitant to reduce the growth rate of its dividends.

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