Question

i)Able to explain in detail and clearly the companies’ dividend payout trend based on the ratios computed above, Clear and detailed explanation on the factors that influence the companies’ dividend policy decision during the five-year period,Able to relate the explanation with relevant dividend theories and concepts.

(300 word only)

Answer 1

The factors that influence the companies dividend policy decision during the five-year period are:

1. Type of Industries: The nature of the industry to which the company belongs has an important effect on the dividend policy. Industries, where earnings are stable, may adopt a consistent dividend policy as opposed to the industries where earnings are uncertain and uneven. They are better off in having a conservative approach to dividend payout.

2. Age of Corporation: Newly formed companies will have to retain major part of their earnings for further growth and expansion. Thus, they have to follow a conservative policy unlike established companies, which can pay higher dividends from their reserves.

3. The Extent of share distribution: A company with a large number of shareholders will have a difficult time in getting them to agree to a conservative policy. On the other hand, a closely held company has more chances of succeeding to finalize conservative dividend payouts.

4. Future financial requirements/reinvestment opportunity: Dividend payout will also depend on the future requirements for the additional capital. A company having profitable investment opportunities is justified in retaining the earnings. However, a company with no capital requirements should opt for a higher dividend.

5. Changes in Government Policies: There could be the change in the dividend policy of a company due to the imposed changes by the government.