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what is the difference between government policy and legal restrictions in factors affecting dividend decision?
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Main factors that influence the dividend decisions are as follows:
The corporate, institutional and legal factors that influence the dividend decision of a firm include the growth and profitability of the firm its liquidity position, the cost and availability of alternative forms of financing concerns about the managerial control of the firm, the existence of external (largely legal) restriction and the impact of inflation of cash flow.
Growth and Profitability:
The amount of growth a firm can sustain and its profitability is related to its dividend decisions, so long as the firm (because of managerially imposed to external market constraints) cannot issue additional equity.
Liquidity:
The liquidity position of a firm is often an important consideration in dividend decisions. Since dividends represent a cash outflow, it follows that the better the cash position and overall liquidity of the firm, the greater is the firm’s ability to pay (and maintain) a cash dividend.
Cost and Availability of Alternative Forms of financing:
The ability of a firm to raise money externally will have a direct bearing on the level of dividends paid to shareholders. Clearly, a company that has easy access to the capital markets, and that can conveniently and economically raise funds in a number of alternative ways, will have greater latitude in setting dividend policy than a firm that has to rely heavily on earnings retention as a source of financing.
Managerial Control:
In some cases, control of the firm may be a factor to consider when establishing dividend policy. Suppose a fairly substantial proportion of the firm is owned by a controlling group, and the remainder of the stock is publicly held. Under these circumstances, the higher the payout ratio, the more likely that a subsequent issue of equity may be needed to finance capital expenditures.
Legal constraints:
The legal rules act as boundaries within which a company can declare dividends. In general, cash dividends must be paid from current earnings or from previous earnings that have been retained by the corporations after providing for depreciation. However, a company may be permitted to pay dividend in any financial year out of the profits of the company without providing for depreciation.
Though the dividends should be paid in cash, but it doesn’t prohibit a company from capitalising its profits or reserves (retained earnings) for the purpose of issuing fully paid bonus shares (stock dividend).
Access to the Capital Market:
Another matter for consideration by management in setting an appropriate dividend policy is the company’s ability to obtain cash on relatively short notice. This may be achieved by the company negotiating for a bank overdraft limit or having access to other short-term sources of funds.
However, if a company’s ability to make a new issue of shares or to issue debt is restricted, it is likely that it will retain a higher proportion of its profits than a company which has ready access to funds from the capital market.
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what is the difference between government policy and legal restrictions in factors affecting dividend decision? Related: Business Finance- An Overview - Financial Management, Class 12 Business Studies
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what is the difference between government policy and legal restrictions in factors affecting dividend decision? Related: Business Finance- An Overview - Financial Management, Class 12 Business Studies for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about what is the difference between government policy and legal restrictions in factors affecting dividend decision? Related: Business Finance- An Overview - Financial Management, Class 12 Business Studies covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for what is the difference between government policy and legal restrictions in factors affecting dividend decision? Related: Business Finance- An Overview - Financial Management, Class 12 Business Studies.
what is the difference between government policy and legal restrictions in factors affecting dividend decision? Related: Business Finance- An Overview - Financial Management, Class 12 Business Studies for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about what is the difference between government policy and legal restrictions in factors affecting dividend decision? Related: Business Finance- An Overview - Financial Management, Class 12 Business Studies covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for what is the difference between government policy and legal restrictions in factors affecting dividend decision? Related: Business Finance- An Overview - Financial Management, Class 12 Business Studies.
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