Question

State any four factors that affect the decision related to how much profit is to be distributed and how much profit is to be retained in the business.

Accepted Answer

Factors that affect the decision related to how much profit is to be distributed and how much profit is to be retained in the business are: (i) Earnings are a major determinant of dividend decision as dividends are paid out of current and past earnings. (ii) Stability of earnings is another factor affecting dividend decision as a company having stable earnings is in a position to declare higher dividends. (iii) Companies generally prefer to maintain stability of dividends while taking dividend decision. (iv) If a company has good growth opportunities, it pays out less dividend. (v) A good cash flow position is necessary for declaration of dividend. (vi) Shareholder’s preference is kept in mind by the management before declaring dividends. (vii) Taxation policy affects the dividend decision as a higher dividend distribution tax will lead to lesser dividend payout. (viii) The possible stock market reaction on the share price to dividend policy is one of the important factors affecting dividend decision. (ix) While taking dividend decision, companies take into consideration their access to capital market. (x) Certain provisions of the Companies Act i.e. legal constraints place restrictions on payout of dividend. (xi) While taking dividend decision, companies keep in mind the restrictions imposed by the lenders i.e. contractual constraints. should be

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