Question

Select a type of distribution and explain the impact the distribution will have on the corporation and its shareholders, as well as the impact the distribution may have on Earnings and Profit.

Answer 1

A dividend is a payment made by a corpration to its shareholders, usually as a distribution of profit or surplus, the corporation is able to re-invest the profit in the business called retained earning and pay a proportion of the profit as a dividend to shareholders.

The impact that the distibution will have on the corporation and shareholders are as follows:

[A] ADVANTAGE TO THE COMPANY:

(i) A cushion to absorb shocks of the economy: It act as a cushion to absorb shocks of the economy and business, such as depression for the company.

(ii) Economical method of financing: It act as avery economical method of financing because the company does not depend on outsiders for raising funds requiredforexpansion,modernisation and growth.

(iii) Helps in following stable dividend policy: Stability of dividend refers to payment of dividend regularly and a company which ploughs back its profits can easily pay stable dividend even when their are no sufficient profit.

(iv)Flexible financial structure: It allows the financial structure to remain completely flexible.As the company need not raise loans for further requirements, if it ploughs back its profit this further adds to the creditworthiness of the company.

[B] ADVANTAGE TO THE SHAREHOLDERS:

(i) Increase in the value of shares: It eenables a company to adopt a stable dividend policy.payment of stable dividend earns a good name for the company and the value of its shares goes up on the market. thus, value of shares in the hands of the investors increase.

(ii)Enhanced earning capacity: With the re-investment of profits in the business, earning capacity of a firmis enhanced and shareholders are benefitted.

(iii) No dilution of control: Due to ploughing back for profits,the company need not issue new shares for future requirements of capital. This enables existing shareholders to retain their control.

(iv) Evasion of super tax: It provides an opportunity foe evasion of super tax in a company where the number of shareholders is less.

Impact on earning and profit may be classified as retained earnings.

Retained earnings is the percentage ofearnings not paid as dividend but retained by the company to reinvest in its core business or pay its debt. Net profit from business operations constitutes the main source of retained earnings. other sources includes accumulated surplus,non-operating income, conversion of accumulated income no longer needed etc. It reflect a sound earning capacity and enables a company to follow a stable dividend policy l. Moreover, it avoides the possibility of a change in control,resulting in issue of shares. It is shown under shareholder's equity on the firms blance sheet. It is also known as retained surplus or retention ratio.