‘Suruchi Textiles Ltd.’ is a reputed textile manufacturing company with stable earnings. It has been paying regular dividends for the last seven years, which has helped it to build a loyal investor base. It has a large number of its shareholders who depend on regular income from their investment and therefore expect at least a minimum dividend every year. To meet these expectations and maintain shareholders confidence, the company has followed a high dividend policy. During the current year, the company planned further expansion, which required additional funds. However, since a major portion of its earnings had been distributed as dividends in earlier years, the company had retained limited funds. But, since ‘Suruchi Textiles Ltd.’ had a strong reputation in the capital market, it was able to raise the required capital from the capital market to finance its expansion plans. Identify and explain four factors affecting the dividend decision discussed in the above case.

Factors affecting Dividend Decision: 1. Stability of Earnings A company having stable earnings is in a better position to declare higher dividends against a company having unstable earnings 2. Stability of Dividends: Companies generally follow a policy of stabilising dividend per share and the increase in dividends is generally made when there is confidence that their earning potential has gone up. 3. Shareholders’ Preference If the shareholders depend upon a regular income from their investments and desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. 4. Growth Opportunities Companies having good growth opportunities retain more money out of their earnings to finance the required investment and thus declare smaller dividends. 5. Access to Capital market 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 tend to pay higher dividends than the smaller companies.