14 Jun 2022


Capital Budgeting and Dividend Policy

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Academic level: College

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Some businesses get involved in transactions with the potential of having huge. Expenses .The process by which these firms determine and evaluate expenses of this nature is known as the capital budgeting (Byrd et al 2013). Firms use sets of rules and policies to know the amount that is payable to their shareholders, this is referred to as dividend policy. Most investors earnings are guided by this policy which is set by the firms upon the evaluation by the firms.However, some investors simply transfer the shares by selling the shares to the next potential shareholders. They then are not affected by the share policy. 

People invest in projects that are sure to give them highest return on capital. Such projects are characterized by high returns and low expenses. This business should have the highest security on capital, high liquidity of capital, relatively low cost of transfers, few tax concessions and should be divisible. These factors play out in the process of selecting an investment to inject capital in (Seitz, 1990) . Companies have several investments to make including mortgage institutions, insurance, savings and commercial banks but its choice is guided by few factors. Liquidity is the relative ease with which an investment can be turned to cash; this plays out in any investment decision to be made. 

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When costs of transfer is also high for investment investors will not inject on it. Cost of transferring an investment in terms of ownership affects the investment decision to be made (Seitz, 1990) . Such costs as the legal costs are expensive and takes longer for the change to occur. Investors prefer investments with zero risks and highly liquid businesses. 

Dividend policy is set by the firms to the shareholders to guide and determine the dividends obtained by each shareholder. The policy to the shareholders is not binding and they can therefore transfer it to the next investors by selling their shares. 


Byrd,J.,Hickman,K.,& McPherson,M.(2013). Managerial finance.(Electronic version). 

Seitz, N. (1990). Capital budgeting and long-term financing decisions (1st ed.). Chicago: Dryden Press. 

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StudyBounty. (2023, September 14). Capital Budgeting and Dividend Policy.


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