'Sarah Ltd' is a company manufacturing cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the com[any and good prospects for growth in future. It is a well managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments
It has taken a loan of Rs. 40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan agreement.
The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company.
Quoting the lines from the above discussion identify and explain any four such factor.

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Solution

Factors affecting
(i) Stability of earnings: A company having stable earnings is in a position to declare more dividends and vice-versa
"It has been consistently for many years."
(ii) Cash flow position: The better the cash flow position of the company, the will the capacity of the company to pay dividend
"There is availability of enough cash in the company"
(iii) Growth opportunities: If the company has more opportunities for growth, it will require more finance. In such a situation, a major part of the income should be retained and a small part of it should be paid as dividend
"Good prospects for growth in the future"
(iv) Shareholders preference: There are two types of shareholders from the point of view of investment (a) those who invest with the purpose of getting some regular income and (b) those who invest in the company to gain capital profit. If the majority of the shareholders are of the former type, the company must declare dividend according to their expectation. On the contrary, if the majority of the shareholders are of the latter type the company enjoys freedom about declaring dividend
"It many have shareholders from their investments."
(v) Contractual constraints: When a company receives finance in the form of debt, the debt provider can put a ban on the company to give any dividend
"It has taken a loan of Rs. 50 lakhs agreement".

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