DIVIDEND DECISION
DIVIDEND DECISION
A financial Manager has to take three important decision.These are:-
1. INVESTING DECISION
2. FINANCING DECISION
3 DIVIDEND DECISION
DIVIDEND DECISION is the third important area of financial management.This decision specifies that how much of profit should be kept for reinvestment opportunities and how much to be distributed as dividend to shareholders.Dividend is appropriation of profit as against interest which is charge against profit.This is the most important area of decision making for finance manager.This decision can be effectively taken by formulating a dividend policy.
FACTORS THAT AFFECTS DIVIDEND DECISION ARE:-
2.Expectation of shareholders-preference of shareholders can be bifurcated in dividend decision or capital gains in the form of bonus share.
3.Liquidity-better the firms cash position higher will be chances of distribution of earning as dividend as dividend represent cash outflow.
4.Trend in industry-the amount of dividend payable in similar industry also affects dividend decision.
5.Legal constraints-Section 123 of companies act 2013 deals with dividend decision.This legal constraints need to complied before declaring dividend
6.Taxation-If a firm has large number of shareholder who are in high income tax brackets than it will be preferred to high retention ratio so that income can be distributed in the form of capital gains against dividend
7.Availability of profits-Dividend is paid out of current year profit and out of previous year profit after providing depreciation.
8.Stability of earning-If the earning of firm is stable than it can maintain its dividend ratio as against when it has fluctuating earnings.
9.Inflation-During inflation dividend payout ratio is kept low as fund is required for internal financing.
10.Economy condition-As uncertain economic condition a firm will like to keep more funds as reserve so that uncertain condition can be faced positively.
11.Cost of external financing-If cost of external financing is high than firm will prefer to declare low payout ration and finance its project with internal financing.
12.Ownership-Generally for retaining control management reluctant to resort external financing and prefer internal financing as a result declares low dividend payout ratio.
13.Discretion of director-Dividend is recommended by directors and approved by shareholders in general meeting as dividend is appropriation of profit.Than highly affected by directors decision.
RELATIONSHIP BETWEEN INVESTING ,FINANCING AND DIVIDEND DECISION
The ultimate objective of financial management is to maximize the shareholders wealth and which can be achieve through effectively taking all these three decision so it is apt to say that these decision are inter-related as any one of the decision can't be taken in isolation of other decision .Hence one has to consider the joint impact of these decision on market price of shares.For example if a firm has a lucrative project in which it wants to invest than it has to decide source from which it will finance this project .Hence investing and finance decision are linked.If it will resort to internal financing for this project than it need to deprive its shareholders from dividend ,It shows financing decision influenced by dividend decision.At last firm is making all this investment so that it can reward its shareholders in the form of higher dividend.It shows all these decision are inter-related.
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