Define DebtEquity Mix and Dividend Policy?

Answer 1

Debt-Equity mix refers to the Proportion of debt and equity with which a Company's Assets are being financed. Debt means the amount of money company has borrowed from lenders, and the company has Legal Liability to pay back that amount alongwith the interest agreed, at the maturity date. Equity refers to the amount of money raised through the owners of the company.In case of common stock(residual owners), they usually dont possess the right to legally sue the company. For Example: If the company has total assets of $1 Million and $0.4 million is financed through debt and $0.6 million is financed through Equity, then the mix will be 40/60. Greater the Debt , more profitable can the company be, but creditors need security for the money they are lending, so there must be a specific portion of equity in the capital structure so that creditors may feel secure. Dividend Policy: Refers to the Management's policy that focuses on the following issues: What kind of Dividend will be distributed amongst the share holders. How much Earning should be distributed through dividends. When the Divident is to be announced and given. Managers use dividend policy as a tool for attracing the investors. For Example: If it is announced that company A is going to announce its dividend soon, the demand of that particular company's stock will increase and will give a rise to the market price of the stock by attracting more investors.