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Factors a Firm Considers in Determining Dividend Policy

Essay by   •  November 4, 2011  •  Essay  •  265 Words (2 Pages)  •  3,672 Views

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Explain the factors a firm considers in determining dividend policy.

Dividend is a distribution to shareholders out of profits or reserves available for this purpose.

The dividend decision of the firm is very crucial because the amount of the profit or reserves to be distributed to the shareholders and amount of profit to be retained by firm.

The factors considered by a firm in determining dividend policy are 1)External Factors 2) Internal Factors

External factors affecting dividend policy are a) General state of economy: If the general state of economy is uncertain economic and business conditions, period of depression, periods of inflation and looking for prosperity, the firm or management may retain large portion of earnings for various purposes.b) State of Capital Market :The state of capital market is favourable liberal dividend policy and unfavourable conservative dividend policy.c) Legal Restrictions Prevailing legal restrictions plays key role in determining dividend.d) Contractual Restrictions : Sometimes Lenders of the firm to protect their interest put restrictions normally liquidity ratio is less 1:1 when the firm experiencing liquidity problems.

Internal factors affecting dividend policy are a) Desire of the shareholders it is always at the interest of the shareholders. b)Financial needs of the company: If the firm has profitable projects and it is costly to raise funds it may retain funds c) Nature of Earnings : If it is stable firm can afford higher dividend d) Liquidity Position : Payment of dividend results in cash outflow so liquidity to be considered. Corporate/firm consider wisely about liquidity of funds before distribution of dividend.

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