LECTURE 2 (1).pptx
- 2. BACKGROUND The three important decisions taken by a finance manager are : Investment, Financing and Dividend decisions Dividend decision is an important decision to be taken by a financial manager 2
- 4. A dividend is a distribution of a portion of a company's earnings, decided by the board of directors. A share of the after-tax profit of a company, distributed to its shareholders according to the number and class of shares held by them is called dividend. 4
- 5. DEFINITION Dividend defined under section 2(35) of the Companies Act, 2013, includes any interim dividend. Section defines dividend so as to mean a distribution of any sums to Members out of profits and wherever permitted out of free reserves available for the purpose. 5
- 6. Payment of Dividend: Inferring from section 124(1) dividend must be paid within 30 days from the date of declaration of dividend. SS-3 hereby clarifies that the Dividend shall be deposited in a separate bank account within five days from the date of declaration and shall be paid within thirty days of declaration. 6
- 7. 7 Unpaid dividend is transferred to unpaid dividend account within next 7 days Unpaid dividend is transferred to unpaid dividend account within next 7 days Dividend is proposed by Board in Board Meeting Dividend is declared by members in General Meeting Dividend shall be deposited in a separate bank account within five days from the date of declaration
- 8. FACTORS AFFECTING DIVIDEND POLICY
- 9. STABILITY OF EARNINGS: 1. Stability of earnings is one of the important factors influencing the dividend policy. If earnings are relatively stable, a firm is in a better position to predict what its future earnings will be and such companies are more likely to pay out a higher percentage of its earnings in dividends than a concern which has a fluctuating earnings. Generally, the concerns which deal in necessities suffer less from fluctuating incomes than those concern which deal with fancy or luxurious goods.
- 10. FINANCING POLICY OF THE COMPANY: Dividend policy may be affected and influenced by financing policy of the company. If the company decides to meet its expenses from its earnings, then it will have to pay less dividend to shareholders. On the other hand, if the company feels, that outside borrowing is cheaper than internal financing, then it may decide to pay higher rate of dividend to its shareholder. Thus, the internal financing policy of the company influences the dividend policy of the business firm.
- 11. LIQUIDITY OF FUNDS: The liquidity of funds is an important consideration in dividend decisions. According to Guthmann and Dougall, although it is customary to speak of paying dividends ‘out of profits’, a cash dividend only be paid from money in the bank. The presence of profit is an accounting phenomenon and a common legal requirement, with the –cash and working capital position is also necessary in order to judge the ability of the corporation to pay a cash dividend. Payment of dividend means, a cash outflow, and hence, the greater the cash position and liquidity of the firm is determined by the firm’s investment and financing decisions. While the investment decisions determine the rate of asset expansion and the firm’s needs for funds, the financing decisions determine the manner of financing.
- 12. DIVIDEND, POLICY OF COMPETITIVE CONCERNS: Another factor which influences, is the dividend policy of other competitive concerns in the market. If the other competing concerns, are paying higher rate of dividend than this concern, the shareholders may prefer to invest their money in those concerns rather than in this concern. Hence, every company will have to decide its dividend policy, by keeping in view the dividend policy of other competitive concerns in the market
- 13. PAST DIVIDEND RATES: If the firm is already existing, the dividend rate may be decided on the basis of dividends declared in the previous years. It is better for the concern to maintain stability in the rate of dividend and hence, generally the directors will have to keep in mind the rate of dividend declared in the past
- 14. DEBT OBLIGATIONS: A firm which has incurred heavy indebtedness, is not in a position to pay higher dividends to shareholders. Earning retention is very important for such concerns which are following a programme of substantial debt reduction. On the other hand, if the company has no debt obligations, it can afford to pay higher rate of dividend.
- 15. ABILITY TO BORROW: Every company requires finance both for expansion programmes as well as for meeting unanticipated expenses. Hence, the companies have to borrow from the market, well established and large firms have better access to the capital market than new and small, firms and hence, they can pay higher rate of dividend. The new companies generally find it difficult to borrow from the market and hence they cannot afford to pay higher rate of dividend.
- 16. GROWTH NEEDS OF THE COMPANY Another factor which influences the rate of dividend is the growth needs of the company. In case the company has already expanded considerably, it does not require funds for further expansions. On the other hand, if the company has expansion programmes, it would need more money for growth and development. Thus when money for expansion is not, needed, then it is easy for the company to declare higher rate of dividend.
- 17. PROFIT RATE Another important consideration for deciding the dividend is the profit rate of the firm. The internal profitability rate of the firm provides a basis for comparing the productivity of retained earnings to the alternative return which could be earned elsewhere. Thus, alternative investment opportunities also play an important role in dividend decisions.
- 18. LEGAL REQUIREMENTS: While declaring dividend, the board of directors will have to consider the legal restriction. The Indian Companies Act, 2013, prescribes certain guidelines in respect of declaration and payment of dividends and they are to be strictly observed by the company for declaring dividends
- 19. POLICY OF CONTROL: Policy of control is another important factor which influences dividend policy. If the company feels that no new shareholders should be added, then it will have to pay less dividends. Generally, it is felt, that new shareholders, can dilute the existing control of the management over the concern. Hence, if maintenance of existing control is an important consideration, the rate of dividend may be lower so that the company can meet its financial requirements from its retained earnings without issuing additional shares to the public.
- 20. CORPORATE TAXATION POLICY: Corporate taxes affect the rate of dividends of the concern. High rates of taxation reduce the residual profits available for distribution to shareholders. Hence, the rate of dividend is affected. Further, in some circumstances, government puts dividend tax on distribution of dividends beyond a certain limit. This may also affect rate of dividend of the concern.
- 21. EFFECT OF TRADE CYCLE: Trade cycle also influences the dividend policy of the concern. For example, during the period of inflation, funds generated from depreciation may not be adequate to replace the assets. Consequently, there is a need for retained earnings in order to preserve the earning power of the firm
- 22. ATTITUDE OF THE INTERESTED GROUP: concern may have certain group of interested and powerful shareholders. These people have certain attitude towards payment of dividend and have a definite say in policy formulation regarding dividend payments. If they are not interested in higher rate of dividend, shareholders are not likely to get that. On the other hand, if they are interested in higher rate of dividend, they will manage to make company declare higher rate of dividend even in the face of many odds.