Question

Dividends

Name five factors that influence a company's dividend policy. Discuss the basis

of each of these.

Answer 1

Factors which affect the payment of dividend and Dividend policy.

a. Stability of earnings: if a firm's earning is unstable then there will be irregular payments of the dividend because the dividend is paid from earnings of the company.

b. Growth objective of the firm & it's financial needs: if the firm is currently looking to expand its operations and invest its earnings then Dividend policy may be affected.

c. Liquidity of the firm: improper working Capital Management can lead to a lack of cash and cash equivalents which affects the payment and policy of dividend.

d. Financial obligations & repayment needs: the firm can have a debt to service (because of its maturity), of the firm, retains its profit for the repayment of debt obligations then Dividend policy may be affected.

e. Access to capital markets: if the firm is easily able to get its financial needs and requirements from capital markets then it is not that much dependent on retained earnings, hence dividend payment capacity increases.