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Word Count: 1,418
1The financial strength of Deanna Perez Fashions in comparison to the industry can be found by a relative comparison of its Current and TIE ratios to the industry averages Both of these averages show the lack of their ability relative to the industry to cover expenses DPFs current ratio an indicator of the extent to which claims of short-term creditors are covered by current assets is much lower than the industry average suggesting that its liquidity position is relatively weak The DPFs TIE ratio of 15 is also very low in comparison to the industry average of 35 This shows that for DPF relative to the industry they have less leeway in the amount operating income can decline before the firm is unable to meet the annual interest costs DPF has been getting weaker in recent years Their Current and TIE ratios were in 1985 at par with the industry DPFs financial weakness is likely to have a binding effect on the dividend policy The corporation will be forced to hold onto retained earnings instead of paying them out in order to protect themselves from bankruptcy costs and legal action 2 Do investors prefer dividends or do they prefer companies to retain earnings This is a question that is very much unresolved It is very hard to understand dividends Three explanations keep coming up The first one is that dividends are irrelevant In other words investors only care about total returns They dont care whether their total return comes from all dividends or all capital gains or a little of both this comes from MM The second argument is that dividends are taxed at higher rates then capital gains and therefore cannot be viewed in favor over capital gains This could suggest that companies that do pay a dividend have a lower stock price The third explanation is that dividends may provide investors with an idea about a firms future earnings strength Large dividend increases
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