Here is my answer , please tell me how to improve and what to change:
It is possible to declare and pay dividends even if a company's net income is negative.
Dividend is a distribution by a corporation to its shareholders, usually based on earnings. They are mainly given out in the form of cash, shares and rarely, non-cash assets.
Even if net income is negative, dividends can still be paid as they can draw the cash from returned earnings.
Firms should give dividends if they have:
Enough retained Earnings to declare the dividend, and
Enough cash to pay the dividend.
Take note that the equation for ending retained earnings is:
Ending Retained Earning = Beginning Retained Earnings + Net Income - Dividend
Thus, having a negative net income for the year does not mean that the company does not have any cash to give out dividends.
However, we must make sure that the company must have positive retained earnings in the long run so that they can continue to finance their business activities, otherwise, the company may just collapse in the long run.
The main reason why companies would want to declare dividend in times of negative net income could be to boost, if not sustain the level of investor confidence. Not doing so may cause investors to pull out in a hurry just because of a period of bad performance, which will affect the firms' future growth plans.
In addition, the negative net income could be a once-off happening which would mean that the firm would have enough retained earnings to pay out dividends. So, as long as it has enough retained earnings to sustain itself, it should be able to pay dividends.
It is possible to declare and pay dividends even if a company's net income is negative.
Dividend is a distribution by a corporation to its shareholders, usually based on earnings. They are mainly given out in the form of cash, shares and rarely, non-cash assets.
Even if net income is negative, dividends can still be paid as they can draw the cash from returned earnings.
Firms should give dividends if they have:
Enough retained Earnings to declare the dividend, and
Enough cash to pay the dividend.
Take note that the equation for ending retained earnings is:
Ending Retained Earning = Beginning Retained Earnings + Net Income - Dividend
Thus, having a negative net income for the year does not mean that the company does not have any cash to give out dividends.
However, we must make sure that the company must have positive retained earnings in the long run so that they can continue to finance their business activities, otherwise, the company may just collapse in the long run.
The main reason why companies would want to declare dividend in times of negative net income could be to boost, if not sustain the level of investor confidence. Not doing so may cause investors to pull out in a hurry just because of a period of bad performance, which will affect the firms' future growth plans.
In addition, the negative net income could be a once-off happening which would mean that the firm would have enough retained earnings to pay out dividends. So, as long as it has enough retained earnings to sustain itself, it should be able to pay dividends.