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Factors Determining Dividend Policy
Profitable Position of the Firm
Dividend decision depends on the profitable position of the business concern. When the firm earns more profit, they can distribute more dividends to the shareholders.
Uncertainty of Future Income
Future income is a very important factor, which affects the dividend policy. When the shareholder needs regular income, the firm should maintain regular dividend policy.
Legal Constrains
The Companies Act 1956 has put several restrictions regarding payments and declaration of dividends. Similarly, Income Tax Act, 1961 also lays down certain restrictions on payment of dividends.
Liquidity Position
Liquidity position of the firms leads to easy payments of dividend. If the firms have high liquidity, the firms can provide cash dividend otherwise, they have to pay stock dividend.
Sources of Finance
If the firm has finance sources, it will be easy to mobilise large finance. The firm shall not go for retained earnings.
Growth Rate of the Firm
High growth rate implies that the firm can distribute more dividend to its shareholders.
Tax Policy
Tax policy of the government also affects the dividend policy of the firm. When the government gives tax incentives, the company pays more dividend.
Capital Market Conditions
Due to the capital market conditions, dividend policy may be affected. If the capital market is prefect, it leads to improve the higher dividend
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FAQs on Factors Determining Dividend Policy - Dividend Decision, Accountancy and Financial Management - Accountancy and Financial Management - B Com
| 1. What is dividend policy? |  |
Ans. Dividend policy is the decision-making process that determines the amount, timing, and distribution of a company's profits to its shareholders as dividends.
| 2. What are the factors that determine dividend policy? | |
Ans. The factors that determine dividend policy include the company's financial position, future capital requirements, profitability, cash flow, growth prospects, tax considerations, and shareholder expectations.
| 3. How do companies decide on their dividend payout ratio? | |
Ans. Companies decide on their dividend payout ratio by considering several factors such as their financial position, profitability, cash flow, growth prospects, and capital requirements. Generally, companies aim to strike a balance between retaining earnings for future growth and distributing profits to shareholders as dividends.
| 4. What are the advantages and disadvantages of a high dividend payout ratio? | |
Ans. The advantages of a high dividend payout ratio include increased shareholder confidence, improved stock liquidity, and reduced agency costs. The disadvantages include reduced financial flexibility, limited scope for reinvestment, and potential negative signaling effects.
| 5. What is the impact of dividend policy on a company's share price? | |
Ans. Dividend policy can have a significant impact on a company's share price. A company that pays high dividends may attract income-oriented investors, leading to an increase in demand for its shares and a rise in its stock price. In contrast, a company that pays low dividends or no dividends may be perceived as having better growth prospects, leading to an increase in demand for its shares and a rise in its stock price.
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