Register now or log in to join your professional community.
The factors that affect the dividend policy in Corporate Organizations are: i. Legal provisions ii. Tax Considerations i. Capital Market Considerations iv. Owners Considerations v. Growth prospects vi. Liquidity Constraints Contractual Constraints
All from i to vi.
What is contractual constraint ?
i. Legal provisions ii. Tax Considerations i. Capital Market Considerations iv. Owners Considerations v. Growth prospects vi. Liquidity Constraints Contractual Constraints
grow rate of the company higher growth will be higher dividend
1. LIQUIDITY POSITION OF THE FIRM- This will show an indication of the ability of the firm to issue dividends. The more liquid it is, the more its ability.
2. GROWTH AND PROFITABILITY- Numbers don't lie. The company has to be making profits for it to issue dividends.
Dividend policy is the strategy company uses to transfer cash to its share holders. The question of dividend policy is how much money the company should pay to shareholders across time.
Dividend decisions relate to the determination of how much and how frequently cash can be paid out of the profits of an entity as income for its proprietor.
The dividend policy of a firm is likely to be influenced by many factors, including management's perception of whether and how dividend policy influences the market value of the company's shares. A among the suggested influences are:
1. Liquidity- in order to pay dividends, a company will require access to cash. Even very profitable companies might sometimes have difficulty paying dividends if resources are tied up in other forms of assets, especially if the bank overdraft facilities are not available.
2. Legal constraints. In many countries, dividends may only be paid from past and present earnings and may not be if their payment will lead to a loss or insolvency for the company.
3.restrictive covenants. The articles of association may contain agreed restrictions on dividend. In addition, some forms of debt may have restrictive covenants limiting the amount of dividend payments or the rate of growth, which applies to them.
4.Stability of profits. Other things being equal, an entity with stable profits is more likely to be able to pay out a higher percentage of earnings than an entity with fluctuating profits.
5. Policy of competitors. Dividend policies of competitors may influence corporate dividend policy. It may be difficult, to reduce a dividend for the sake of further investment, when your competitors follow a policy of higher distribution.
6.Signaling effect. Dividends are seen as signals from the company to the financial markets and shareholders. Investors perceive announcements as signal of future prospects for the entity.
7.Taxation for corporate taxes .dividend payment might affect the amount and timing of corporate tax payments. For personal taxation, it may be tax efficient for some shareholders to sell shares at profit and be charged to capital gains tax rather than to receive high dividends and be charged to income tax.
8 Rate of expansion. The faster the predicted corporate growth, the greater the amounts of funds entities are likely to need to finance expansion. Obtaining funds by restricting dividend is one way of achieving faster growth. The timing of future investments may also influence dividend payout.
All above but one thing which is more important is the rate of return of the potential projects company planning to undertake...
vi. Liquidity Constraints Contractual Constraints
Legal Provisions - By Law companies are compelled to districbute dividends. But the law may impose some conditions in the distribution of dividends and these are; the net profit rule i.e to say dividends can only be paid if the companies shows it has made profits; insolvency rule where a company is seen as insolvent it shouldnt pay dividends and lastly the capital imparement rule is rule that limits payout of dividends in firm.
Tax Consideration - Simply put dividends can only be paid after tax amounts have been deducted from the profits made.
Owners Considerations; this may be either to pay didvends at the end of each trading period or reinvest so as to be able to grow the organization.
Liquidity position; if the organization is liquid the shareholders may choose to payout the dividends and if not the dividend payments may deferred to such time when there are no liquidity constraits.
Yes, I support this speech altogether
