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Factors affecting dividend policy

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A brief presentation on the factors affecting dividend policy prepared for class room presentation at Institute of Management in Kerala

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Factors affecting dividend policy

  1. 1. FACTORS AFFECTING DIVIDEND POLICY Finance Management Sharon M MBG 1505032 SHARON M, INSTITUTE OF MANAGEMENT IN KERALA
  2. 2. DIVIDEND POLICY “Policy that a company uses to decide the amount to be paid to the shareholders in form of dividends” A company in growth may either choose to pay dividend or may re-invest its profits A company paying dividend should decide on the amount to be paid and the time of payment  Potential shareholders may critically evaluate dividend policy before investing SHARON M, INSTITUTE OF MANAGEMENT IN KERALA
  3. 3. FACTORS AFFECTING DIVIDEND POLICY 1.Stability of Earnings: >More stable incomes, consistent dividend policy >Often seen with firms dealing in necessities 2.Age of Corporation >A newly established corporation will require more money for expansion and may not a rigid policy 3.Liquidity of funds >Greater the liquidity, greater company’s ability ot pay dividend SHARON M, INSTITUTE OF MANAGEMENT IN KERALA
  4. 4. 4.Extend of Share Distribution: >A closely held business (shareholders are known each other) will make it easy for the company to have a flexible policy >A widely held company (large,diverse shareholders) will demand higher and frequent dividends 5.Need for Additional Capital >Greater the need for additional capital, less likely for the company to have a rigid policy 6.Trade Cycles: >Dividend policy is adjusted to market oscillations >During boom, a company may hold a part of profit as a reserve for contingencies >Higher rate of dividend may be used to attract investments during off periods 7.Government Policies >Government might restrict the distribution of dividends SHARON M, INSTITUTE OF MANAGEMENT IN KERALA
  5. 5. 8.Taxation Policy: >Higher the tax rates, lower the dividends >Divident-tax may be levied for distribution of dividend beyond a certain limit >In India dividend tax is 7.5% for dividends beyond 10% 9.Legal Requirements: >Company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. >Dividend should not be distributed out of capita > Contractual liabilities should be fulfilled ,like,payment of dividend on preference shares in priority over ordinary dividend 10. Past dividend Rate >Current rate should be around average past rate >Abnormally low or high rates will arouse speculation SHARON M, INSTITUTE OF MANAGEMENT IN KERALA
  6. 6. 11.Ability to Borrow: >Greater the ability to borrow (established firms), better would be the dividend policy 12.Policy of Control: >If greater control is desired, dividends will be declared at low rates to keep out investors 13.Repayments of loan: >Loan indebtedness usually means low or now dividends >Sometimes lenders may demand restricted dividend distribution till the repayments 14.Time : >Dividend declaration should be at the time when cash outflow is at the minimum 15.Regularity and Stability >Greater the regularity and stability of dividend payment, more investers will be attracted. SHARON M, INSTITUTE OF MANAGEMENT IN KERALA
  7. 7. THANK YOU SHARON M, INSTITUTE OF MANAGEMENT IN KERALA

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