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Business Studies · 2023 · 4 marks
CBSE 2023 · Region 2 · Set 1 · Q28
Identify the financial decision that is concerned with deciding how much of the profit earned by a company is to be distributed to shareholders and…
Identify the financial decision that is concerned
with deciding how much of the profit earned by a
company is to be distributed to shareholders and
how much should be retained in the business. Also
state any three factors affecting the identified
decision.
Marking-scheme solution
Dividend Decision
Factors affecting Dividend Decision :
(i)
Amount of Earnings affect dividend as they are paid
out of current and past earnings.
(ii)
A company having stable earnings is in a better
position to declare higher dividends as compared to a
company with unstable earnings.
(iii)
Companies generally follow a policy of stabilising
dividend per share and the increase in dividend is
generally made when the earning potential goes up.
(iv)
Companies having good growth opportunities
retain more money out of their earnings so as to finance
the required investment and the dividend is, therefore,
smaller.
(v)
Availability of enough cash in the company is
necessary for declaration of dividend.
(vi)
If shareholders prefer that at least a certain amount
is paid as dividend, the companies are likely to declare
the same.
(vii)
If tax on dividend is higher, it is better to pay less
by way of dividends as compared to low Dividend
Distribution Tax.
(viii)
The possible impact of dividend policy on the
equity share price or the way the stock market will react
to it is an important factor considered by the
management while taking a decision about it.
(ix)
Large and reputed companies generally have easy
access to the capital market, and therefore, may depend
less on retained earnings to finance their growth, and
therefore, pay high dividends.
(x)
Certain legal constraints like provisions of the
Companies Act place restrictions on payouts as
dividends, which must be adhered to while declaring
the dividend.
(xi)
The companies are required to ensure that the
dividend payout does not violate the terms of any
contract, like a loan agreement, in this regard.
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CBSE Class 12 Business Studies past-paper question from the 2023 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.