Distribution of Dividends Essay Example | Topics and Well Written Essays - 1750 words

Distribution of Dividends - Essay Example Moreover, we will discuss practical examples of companies that give dividends and purchase their own shares. Similarly, the process of determining the disbursement of dividends is discussed in this paper. In an organization share holders are of utmost importance because they buyout the shares of the company and certain affairs of the company are carried out because of share holders. Therefore, organizations take care of their shareholders by giving them dividends. The profit of the company is either reinvested in the company or the share holders are given dividends. Usually, shareholders receive dividends with respect to their share holding in the company. However, giving dividends to the shareholders is a critical method and it is considered as the core decision making element of the company (Madura, 2008). Proper brainstorming and decision making capabilities is essential for in this process because through dividends shareholders are motivated more to invest in the company. There are certain forms of giving the dividends like dividends are distributed on cash basis and they are known as cash dividends. These dividends are distributed through checks and these are taxable in the reci pient in the year when they are actually paid. Certain dividends are distributed in the form of additional shares and in certain cases dividends are given in the form of property and they are known as property dividends. However, the distribution process is based on certain characteristics and it is one of the crucial decisions for the top hierarchy of an organization. Divided policy of the organization is considered to be an important element in determining the distribution of dividends. This policy revolves around the idea of payout earnings versus retaining and then reinvesting them. The dividend policy includes certain factors like: How frequent the company would pay dividends What are stable or irregular dividends What is high or low dividend payout Investor preferences and theories of dividend policy Dividends are paid to the shareholders in order to keep them attached and interested with the company. Usually, there are three theories of dividend policy these are: Dividend irrelevance Bird in the hand Tax preference Dividend irrelevance This theory is widely used in the process of distributing dividends. However, this policy arises that the investors are indifferent between the phenomenon of dividends and retention-generated capital gains. Investors have the tendency to create their own policy that if they want cash they can sell their stocks (Mishkin & Eakins, 2008). Similarly, if they don't want cash then they can use dividends to buy the stock. This model was proposed by Modigliani and Miller but it was based on unrealistic assumptions. The core aspect of this theory is that investors are not concerned about the company policy on dividends because they have the choice of selling portfolio of equities if they are interested in having cash. The issuance of dividends should have negligible or no impact on the stock price. Bird-in-the-hand theory Investors think that the dividends of the company are less risky as compared to the future capital gains, therefore they prefer dividends.

Financial services ( Derivatives ) Essay Example | Topics and Well Written Essays - 1750 words

Financial services ( Derivatives ) - Essay Example In United Kingdom, derivatives can be traded by two methods: either through an over-the-counter (OTC) or organised exchange. The exchange traded derivatives market is controlled by Chicago Mercantile Exchange and Euronext.LIFFE that is based in London. Exchange traded derivatives are always bought and sold in an exchange setting that is totally regulated and transparent. On the other hand, OTC exchanges takes place when trader prefer to trade directly with each other. Between both types of trade, there are two main differences: Firstly, exchange traded contracts increases liquidity. Secondly, traders enter into a contract through the exchange clearing house which gives them a guarantee that the contract will be adhered to. Over-the-counter trade do not have that lavishness because there is always the risk that one of the contractors will fail to honour the original agreement thereby going into liquidation (Reid, 2013, p.1). This paper will focus on the list of bank and companies maki ng losses from using derivatives and what are the risks and benefits of different types of derivatives contracts. Bank and Companies Exposed to Losses There are some banks and companies which are exposed to losses due to derivative contracts. ... The financial disorder with its rigorous liquidity and credit crunch seemed to detain to financial markets and institutions in the UK. It resulted in the failure of the key businesses, downturn in the economic activity and reveals a quick drying up of liquidity following a huge expansion in credit issued to consumers and financial institutions. Metallgesellschaft AG engaged in a wide range of activities from engineering to trade and mining and financial services. The firm was exposed to large derivatives related losses at its U.S. oil subsidiary which is known as Metallgesellschaft Refining and Marketing. It had accounted a loss of $1 billion. Metallgesellschaft AG losses were attributed to its wrong hedging program. Risk of Derivative Contracts Risks associated with derivatives are market risk, credit risk, counterparty credit risk, transparency risk, legal risk and basis risk. Counterparty Credit Risk It is the risk that a party to a derivative contract will be ineffective to perfo rm on its obligation. AIG tinted weakness in the supervision of counterparty risk and thus less clearable, OTC derivatives. AIG’s counterparties had decided to only require collateral to cover counterparty risk of American International Group if AIG were downgraded. When American International Group did experience the difficulties simultaneous liquidity squeeze and collateral calls at AIG resulted in its ultimate bail-out to evade systemic outcome. Posting to collateral either through upfront margins or mark-to-market margins is used to minimise counterparty risk to which they are exposed (Fsa, 2009, p.5). Transparency Risk The bankruptcy of Lehman Brothers tinted that positions and disclosure of firms in OTC derivative market were