A company having an easy access to the capital market will follow a liberal dividend policy in comparison to others. Dividend policy refers to the decision of the board regarding distribution of residual earnings to its shareholders.
Payment of dividend leads to increase in the price of shares on the one hand but leads to a crunch in liquid resources for financing of prospective projects. There is an inverse relationship between dividend payment and retained earnings. According to some schools of thought dividend policy has significant impact on the value of the firm.
Therefore the dividend policy should be developed keeping in mind the wealth maximization objective of the firm. Dividend policy is a financing decision and leads to cash outflows and also leads to decrease in availability of cash for financing of profitable projects.
If sufficient funds are not available, a firm has to depend on external financing. Therefore the dividend policy needs to be devised in such a manner that prospective projects may be financed through retained earnings.
Fluctuation in the rate of return adversely affects the market price of shares. In order to have a stable rate of dividend, a firm should retain a high proportion of earnings so that the firm can keep sufficient funds for payment of dividend when it faces loss. Issue of new shares or dependence on external financing will dilute the degree of control of the existing shareholders.
Therefore, a more conservative dividend policy should be followed in order that the interest of existing shareholders is not hampered. Meaning, Concept and Nature of Dividend. Concept, Importance and Steps. Important contractual restrictions may be accepted by the company regarding payment of dividends when the company obtains external funds. These restrictions may cause the firm to restrict the payment of cash dividends until a certain level of earnings has been achieved or limit the amount of dividends paid to a certain amount or percentage of earnings.
Internal constraints are unique to a firm and include liquid assets, growth prospects, financial requirements, availability of funds, earnings stability and control. The dividend policy is also likely to be affected by the owner's considerations of the tax status of the shareholders, their opportunities of investment and the dilution of ownership. The extent to which the firm has access to the capital markets, also affects the dividend policy.
In case the firm has easy access to the capital market, it can follow a liberal dividend policy. If the firm has only limited access to capital markets, it is likely to adopt a low dividend payout ratio.
Such companies rely on retained earnings as a major source of financing for future growth. With rising prices due to inflation, the funds generated from depreciation may not be sufficient to replace obsolete equipments and machinery.
So, they may have to rely upon retained earnings as a source of fund to replace those assets. Thus, inflation affects dividend payout ratio in the negative side. Bonus share is referred to as stock dividend. They involve payment to existing owners of dividend in the form of shares. It is an integral part of dividend policy of a firm to use bonus shares and stock splits. A stock split is a method commonly used to lower the market price of shares by increasing the number of shares belonging to each shareholder.
Bonus shares may be issued to satisfy the existing shareholders in a situation where cash position has to be maintained. We have the best tutors in accounts in the industry. Our tutors can break down a complex Determinants of Dividend Policy problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Determinants of Dividend Policy concepts.
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The policy that a firm uses to decide, how much portion of the firm’s net earnings or profit after tax must be paid to the shareholders in the form of dividends to keep them happy is known as Dividend Policy.. Determinants of Dividend Policy.
Determinants of Dividend Policy in Financial Management - Determinants of Dividend Policy in Financial Management courses with reference manuals and examples. As expected, there is a positive relationship between the size of a firm, its P/E ratio and dividend payout ratio. However, the results are statistically insignificant. 4. Conclusions The paper examines determinants of dividend policy of non-financial companies listed on Warsaw Stock Exchange.
Dividend policy is the policy used by a company to decide how much it will pay-out to shareholders in the form of dividends. Usually a company retains a part of its earnings and distributes the other part as dividend. From the view point of value maximization, the value of shares depends very much. Kuwari () studied the determinants of the dividend policy in GCC countries. The study investigated the determinants of dividend policies for non-financial firms listed on the Gulf Co-operation Council (GCC) country stock exchanges. The study found.