QUESTION

Tawala Ltd is a fast growing manufacturing firm.It earns above industry return on its investment.It has been earning a rate in excess of 25 per cent on its investments in the past and has good prospects of earnings at the same rate in the future as well.Tawala Ltd has been following a dividend policy of paying 70 per cent of the earnings to shareholders and retaining 30 per cent.This dividend policy is justified on the grounds that the dividends have a positive impact upon the price of the share.

If most of the company shareholders are young wealthy persons in high tax brackets, is the current dividend policy justified?