Question

Task 3:

Each company may follow its own dividend policy to distribute dividends to its own shareholders. You are required to explain the meaning, types of dividend policy for the listed company. Also, explain the factors affecting the dividend policy of a company?

Answer 1

* MEANING: A Dividend policy refers to the explicit or implicit decision of the board of directors regarding the amount of residual earnings(past or present) that should be distributed to the shareholders of the company.

* TYPES:

1) REGULAR DIVIDEND POLICY: payment of dividend at usual rate is termed as regular dividend. The investors such as retired person, widows, other economically weaker persons prefer to get regular dividend.

2) STABLE DIVIDEND POLICY: The stability of dividend means consistency in the srream of dividend payments. It means payment of certain minimum amount of dividend regularly.

3) IRREGULAR DIVIDEND POLICY: This policy is followed when there is uncertainity of earnings, unsuccessful business operations, lack of liquid resources, fear of adverse effecrs of regular dividend on the financial standing of the company.

4) NO DIVIDEND POLICY: A company may follow a policy of paying no dividends presently because of its unfavourable working capital position or on account of requirements of funds for future expansion and growth.

* Factors affecting the dividend policy of a company:-

1) SHAREHOLDER's EXPECTATIONS: Shareholder's preference for dividends or capital gains may depend on their economic status and the tax treatment on dividends and capital gains.

- Retired and old persons prefer to invest in companies with regular dividend.

- wealthy investors prefer capital gains to minimize tax.

2) LEGAL CONSIDERATIONS: Dividends can only be paid out of profits and are not to be paid out of capital . A divident couldnot be paid if it would make the company insolvent.

3) LIQUIDITY: Greater the cash position and overall liquidity of a company, the grrater will be its ability to pay dividends.

4) FINANCIAL CONDITIONS AND BORROWING CAPACITY: A highly levered company may expect to retain earnings to strengthen its equity base.

5) ACCESS TO THE CAPITAL MARKET: A company that is not sufficiently liquid can still pay dividends if it is able to raise debt and equity in the capital market.