Question

explain the financial factor that can be used to determine the quantum of retention funding that can be absorbed by the enterprise

Answer 1

Dividend is the financial factor which determine the quantum of retention funding that can be absorbed by the enterprise. Retention of fund and dividend complement each other. Companies retain funds after distributing a certain portion to its shareholders. Some companies do not distribute all the profits to the shareholders rather they will retain it as retention fund. Some companies distribute a portion of the profits to the shareholders and will retain the balance as retention fund. The retention fund which is retained in the company is also called ploughing back of profits or retained earnings. If the company has some expansion plans in future, it will retain all the profits as retained earnings. It is the responsibility of finance manager to determine the ratio of retention and payout. Retention fund can be absorbed by the enterprise for financing the projects without dilution of control.

Thus Dividend decision which is one of the functions of financial management is the important factor which determine the quantum of retention funding.