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    Ass - 2 - 2 - Dividend Policy PDF

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    Jayaprakasan T
    A dividend is a payment made to shareholders from a company's profits. A company's dividend policy involves determining how much of its profits to distribute to shareholders as dividends versus retaining for future business needs. Many factors influence a company's dividend policy, including legal restrictions, earnings size and stability, shareholder preferences, liquidity needs, management attitudes, capital market conditions, business cycle factors, and ability to borrow funds. Establishing an appropriate dividend policy balances distributing value to shareholders with retaining funds for business investment and growth.

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    Ass - 2 - 2 - Dividend Policy PDF

    Uploaded by

    Jayaprakasan T
    62 views2 pages
    A dividend is a payment made to shareholders from a company's profits. A company's dividend policy involves determining how much of its profits to distribute to shareholders as dividends versus retaining for future business needs. Many factors influence a company's dividend policy, including legal restrictions, earnings size and stability, shareholder preferences, liquidity needs, management attitudes, capital market conditions, business cycle factors, and ability to borrow funds. Establishing an appropriate dividend policy balances distributing value to shareholders with retaining funds for business investment and growth.

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    A dividend is a payment made to shareholders from a company's profits. A company's dividend policy involves determining how much of its profits to distribute to shareholders as dividends versus retaining for future business needs. Many factors influence a company's dividend policy, including legal restrictions, earnings size and stability, shareholder preferences, liquidity needs, management attitudes, capital market conditions, business cycle factors, and ability to borrow funds. Establishing an appropriate dividend policy balances distributing value to shareholders with retaining funds for business investment and growth.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    62 views2 pages

    Ass - 2 - 2 - Dividend Policy PDF

    Uploaded by

    Jayaprakasan T
    A dividend is a payment made to shareholders from a company's profits. A company's dividend policy involves determining how much of its profits to distribute to shareholders as dividends versus retaining for future business needs. Many factors influence a company's dividend policy, including legal restrictions, earnings size and stability, shareholder preferences, liquidity needs, management attitudes, capital market conditions, business cycle factors, and ability to borrow funds. Establishing an appropriate dividend policy balances distributing value to shareholders with retaining funds for business investment and growth.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Dividend: Definition

    Before discussing dividend policy, it’s important to define the term “dividend.”

    A dividend is a payment made to shareholders in lieu of their share capital. It is that portion of a company’s profits that is
    distributable among its shareholders according to the resolution passed in the meeting of the board of directors.

    This may be a fixed percentage on the share capital or a fixed rate per share. The economic soundness of a company is judged by the
    amount of dividends declared and paid by the company. It affects shareholders and the goodwill of the firm.

    Dividend Policy: Definition and Explanation


    Dividends are part of the profit distributed to a company’s shareholders. The question that the board of directors must answer is how
    much to distribute and how much to retain in the business as a resource to meet future contingencies and expansion.

    Allocation of profit between shareholders and retained earnings is an essential part of the function of management.

    Thus, dividend policy involves establishing a suitable dividend pattern to distribute to a company’s shareholders through its board of
    directors. Dividend policy is a system of decision-making and problem-solving.

    Dividend policy has far-reaching consequences in terms of its influence on share price, growth rate, and goodwill. A higher market
    price of shares and higher current dividends increase shareholder wealth.

    Factors Influencing Dividend Policy


    Many factors influence a company’s dividend policy, including:

    1. Legal Restrictions: The legal restrictions that influence dividend policy are as follows:

    Dividends can only be paid out of profit and not out of capital
    Companies can declare and pay dividends using the previous year’s profit
    At least 10% of profit must be transferred to the company’s reserves
    Dividends are payable in cash, but by following legal formalities, dividends can also be paid in bonus shares or assets

    2. Size of Earnings: Dividend policy is dependent on the earnings of the firm. It is not only the amount of dividend but also the nature
    of the earnings that bears upon dividend policy. A stable dividend policy is preferable.

    3. Shareholder Preferences: Management should follow a policy that suits the interests not only of the company but also its
    shareholders.

    4. Liquidity Position: A company’s dividend policy must consider the liquidity position of the company. The payment of dividends
    reduces the company’s cash reserves of the company.

    Growing companies have a pressing need for funds, and so, for these companies, the payment of dividends in cash should be avoided.

    5. Management Attitude: Some companies use internal sources to finance expansion programs because issuing new shares would
    alter the control of the company. When debentures are issued to finance expansion, this runs the risk of causing the earnings of
    existing members to fluctuate.

    6. Condition of Capital Market: When the capital market is comfortable, companies can follow a liberal dividend policy.

    7. Stability of Earnings: When a company is making remarkable progress and has stable earnings, a liberal dividend policy can be
    followed.

    8. Trade Cycle: When there is inflation in the country, the company will earn more profit. Therefore, the company can distribute more
    dividends and, when it needs funds, these can be borrowed externally at a favorable interest rate.

    9. Ability to Borrow: A company that can borrow from external sources at a cheap rate can borrow from the outside. In such cases,
    the cost of borrowed capital and retained earnings can be compared.
    10. Past Dividend Rate: While deciding on a dividend policy, managers and the board of directors should pay attention to the
    dividend rate in previous years.

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