QUESTION 1
Paying a dividend is the usual way for a company to distribute a share of its profits among the shareholders. In a public company, the usual practice is for the directors to declare and pay an interim dividend based on the accounts for the first six months of the company’s financial year. The directors will then recommend a final dividend to the Annual General Meeting based on the profits made in the full year, and the AGM then passes a resolution declaring that dividend.
In private companies the practice varies widely. If the company is making profits there are essentially two ways in which those profits can be paid over to the people who own and run the company. One is for the directors (or others, e.g. family members) to be paid salaries or fees for the work they have done for the company. The other way of taking money out of the company is for the company to pay dividends. These are paid to shareholders (rather than directors) and (unless the company has special articles) must be paid in accordance with the rights of the respective shareholders. Dividends are taxable as investment income in the shareholders’ hands. The tax rates for dividends are generally lower than for other sources of income. (Company Law, 2012)
REQUIRED:
Based on the extract above, answer the following scenario questions:
Your father asked you why his investment in a publicly traded stock is not paying him any dividend. He said, “As far as I know, they never have. I invested in the company to get something back and so far, I haven’t received anything. Shouldn’t the company be looking after its shareholders?”
Within 1000 – 1500 words comment whether should all companies be required to pay dividends and why dividends are important to shareholders? If your father receives the dividend at the end of the financial year, how do you record a dividend payment to stockholders?
(Total: 25 marks)
