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Business Studies · 2022 · 3 marks
CBSE 2022 · Region 3 · Set 1 · Q7
State any three factors affecting dividend decision of a company.
State any three factors affecting dividend decision
of a company.
Marking-scheme solution
Factors affecting dividend decision are
:
(a) Amount of earnings: Earnings is a major determinant
of the decision about dividend as dividends are paid
out of current and past earnings.
(b)
Stability of Earnings: A company which has stable
earnings is in a better position to declare higher
dividends in comparison of those companies with
unstable earnings.
(c)
Stability of Dividends: The companies having policy
of stabilizing dividend per share, do not alter if the
change in earnings is small or seen to be temporary in
nature.
(d)
Growth Opportunities: Companies having good
growth opportunities retain more money out of their
earnings to finance the required investment, therefore,
the dividend in growth companies is smaller than that
in the non–growth companies.
(e)
Cash Flow position: Availability of enough cash in
the company is necessary for declaration of dividend
because a company may be profitable but short on
cash.
(f)
Shareholders Preference: While declaring
dividends, managements must keep in mind the
preferences of the shareholders in this regard and if
the shareholders in general desire that at least a
certain amount is paid as dividend, the companies are
likely to declare the same.
(g)
Taxation Policy: If tax on dividend is higher, it is
better to pay less by way of dividends, whereas
higher dividends may be declared if tax rates are
relatively lower.
(i)
Stock Market Reaction: The possible impact of
dividend policy on the equity share price is one of
the important factors considered by the management
while taking a decision about it, as investors, view an
increase in dividend as good news and stock prices
react positively to it.
(j) Access to the capital market: Large and reputed
companies which have easy access to the capital
market, depend less on retained earnings to finance
their growth and thus, tend to pay higher dividends
than smaller companies which have relatively low
access to the market.
(j) Legal constraints: Certain provisions of the
Companies Act place restrictions on pay-outs as
dividend which must be adhered to while declaring
the dividend.
(k) Contractual constraints: The companies are
required to ensure that the payment of dividend does
not violate the terms of any contract entered by the
company.
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CBSE Class 12 Business Studies past-paper question from the 2022 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.