Question

Explain Any Four Factors Affecting 'dividend Decision' of a Company

Answer 1

The factors that affect the dividend decision of a company are as follows:

1. Earning: The company pays dividends based on current and previous year’s earning. If the earnings are more then the company provides more dividend or a higher rate of dividend whereas if the company has less earnings, there will be lower rate of dividend payout.
2. Stability in earning: Companies with stable earnings provide high rate of dividend while companies with fluctuating earnings or unstable earnings provide lesser dividend.
3. Cash flow position: Companies that have a surplus flow of cash will be declaring dividend at a higher rate while companies having negative cash flow may or may not declare dividend. If declared, it will be at a low rate.
4. Growth plans: If a company is looking to invest in new projects then reinvesting the earnings is a good way to get the much needed capital or they can seek additional capital. Retained earnings are a cheaper source of capital and require minimal paperwork.