In addition, an explanation to support the variation in the contribution margin of the five services is provided and possible resource constraints faced by the firm is provided.
Firms adopt different dividend policies which are in line with their goals. Dividend payment is preferred by shareholders since that is their source of reward for contributing equity capital. The article states that dividend payment is simply a transfer of value within the firm. That is, the movement of value already owned by the shareholders to shareholders. Therefore, there is no level of dividend payment that contributes to value creation. The statement is true for the reason that dividend payment does not increase the firm’s ability to increase the economic benefits. In other words, a firm cannot increase its cash flow generating ability by paying dividends. However, the payment of cash dividends has a positive impact on the value of a firm (market value).
The market value of a firm (market capitalization) is determined by multiplying the outstanding shares of a firm with the current share price. It has been observed that the payment of cash dividends by firms increases the market value of companies. The increase is brought about as follows: when a firm pays cash dividends, more shareholders, who prefer certain payments, are attracted (Frankfurter, Wood & Wansley, 2003, pp. 91). The demand of shares of that company increases, thus increasing the share price. Consequently, the market value of the firm increases. There are two theories of dividend payment which supports the influence of cash dividend on the market value of the firm. That is, the bird-in-hand theory and information signalling dividend payment theory (Hunting & Paulsen 2013).
The bird-in-hand, dividend payment theory states that stockholders prefer certainty due to their aversion towards risk. Dividend payments are more assured as compared