financial management financing decision dividend decision factors affecting practice exercise

1. Financial management
Dividend
Decision

2. The financial decision of management is
concerned with three board decisions which
are:
1.Investment decision
2.Financing decision
3.Dividend decision
Financial decision

3. DIVIDEND DECISION
 Dividend is that portion of profit which is
distributed to shareholders.
 Dividend decision relates to the appropriation of
earned profits
 A company has to decide how much profit to
distribute as dividend and how much to retain for
investment in the business
 The dividend policy of the company should be to
maximize market value per share. The dividend
decision should be made keeping in mind the
overall objective of maximising shareholders
wealth.

4. 1. Amount of Earnings: dividend can be paid
out of current and past earnings so it is the
main determining factor of dividend policy.
2. Stability earnings: A company having stable
earnings is in a position to declare higher
dividend, otherwise strict dividend policy is
followed.

5. 3.Stability of dividend : Companies generally follow a
stable dividend policy. They follow increasing dividend
policy when there is confidence that their earning
capacity has gone up.
4. Growth opportunities : Companies having good
growth opportunities retain more money. Out of their
earnings so as to finance the required investment
5. Cash flow position: Dividend involves an outflow of
cash. A company may be profitable but short in cash.
Availability of enough cash in the company is necessary
for declaration of dividend.

6. 6. Shareholder’s preference: Desire of shareholders for
dividends depends upon their economic status. While
declaring dividend management must keep in mind the
preference of shareholders.
7. Taxation policy : The taxation rate affects the net
earnings of a company and thereby its dividend policy
also. If tax on dividend is higher, it is better to pay less
by way of dividends.
8. Stock market reactions : An increase in dividend
policy has a positive impact on the share price. It is
good news for the investors and hence stock price
increase. Decrease in dividend has a negative impact
on the share price.

7. 9. Access to capital market : large and reputed
companies depend less on retained earnings and tend
to pay higher dividends than the smaller companies
which have relatively low access to the market.
10. Legal constraints : As per the provisions of
companies Act dividend can be paid only out of
current or past profit after providing for depreciation.
No dividend can be paid out of capital. Such
provisions must be adhered to while declaring the
dividend.

8. 11. Contractual constraints: Sometimes the
lenders may impose certain restrictions on the
payment of dividends in future. The companies
are required to ensure that the dividend
doesn’t violate the terms of the loan agreement.

10. Name the decision in financial
management which should be taken
keeping in view the overall objective
of maximising the shareholders
wealth
 Dividend decision is taken keeping
in view the overall objective of
maximising the shareholders
wealth

11. Name the major
determinant of dividend
decision?
 Amount of earning is the major
determinant of dividend decision

12. Which company is in
position to declare high
dividend?
 A company having stable
earnings can declare high
dividends

13. When does a company prefer to
pay less dividends while
shareholders prefer higher
dividends
 When dividend distribution tax is higher
because dividends are free of tax in the
hands of the shareholders while a
dividend distribution tax is levied on
companies

14. How can dividend
decision be influenced by
stock market?
 Increase in dividend increases the
market price of shares in stock
market.