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Essay / Research Paper Abstract
This 16 page paper discusses the statement that “the cost of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of shares and to pay cash dividends during the same year”. The writer argues this both ways; how this may make economic sense, but due to the way in which the markets operate, using dividends as a signalling tool a share issue may create more value for the shareholder and a greater market value for the company. The bibliography cites 20 sources.
Page Count:
16 pages (~225 words per page)
File: TS14_TEshrdiv.rtf
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Unformatted sample text from the term paper:
competitors. There are many resources a company may seek to maximise. In addition to inventory, materials, people and assets, resources also includes capital and access to capital. The capital structure
and use of capital in any company may be seen as a key determinant of the success of failure of a company. It has been argued that "the cost
of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of shares and to
pay cash dividends during the same year". This is a controversial statement. To understand this there are several aspects we may examine. Here we will assume that we are talking
of public limited companies whose shares are readily available in the stock market, not closed companies. It would appear to be common sense that before money is raised where
there are incurred costs that existing funds should be used for the benefit of the business. The statement seeks to argue that if there is money in the bank, that
can cover the cost of a proposed new investment, then it would appear to be a facility to use that money to pay dividends and raise funds elsewhere, either
by borrowing or by issuing more shares. This would save the cost of the issue, and as the money is already available in the bank then we may also
argue there will be no lag in terms of time, which may also be seen as a key factor in business. Time delays can increase costs, especially if the investment
is the result of an emergent strategy (Thompson., 1998). This is a strategy that is not planed, but results from changing circumstances, or an opportunity that presents itself. However, this
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