Explain the factors that influence the dividend policy of the firm.

Dividend policy of a firm should be depend on maximization stockholders wealth by maintenance the resources of the firm through over many ways as keeping suitable liquidity , solvency and using retained earnings in the higher profit opportunities rather than dividend .

When you buy a company's stock, you are buying a partial ownership of the company. As an owner, you are entitled to a percentage of the company's profits. This profit will be paid to your shares as a dividend payment. Factors that affect your company's dividend payout are the structure of the business, the stability of the company's earnings, the company's access to capital, and any dividend restrictions on the compan.

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A company can offer a dividend to convince an investor to buy its stock instead of the shares of a competitor, because the investor enjoys receiving a stream of income that does not force him to sell his shares. An investor may also decide against investing in a company if it pays out large dividends, because the investor wants the company to make profitable investments instead of giving his money back.

• 1 Shareholder Preferences
• 2 Income Stability
• 3 Managers
• 4 Alternative Activities
• 5 Economy

Stockholders' preferences influence dividend policies. An investor who has few additional sources of income, such as a retiree, is more likely to choose stocks that have significant dividend payouts. She is likely to be in a lower tax bracket, and the dividends are a significant source of income. She also prefers to collect cash now, instead of waiting for a future payout. An executive who earns $500,000 a year might not want a dividend, because she has to pay heavy taxes on any dividend she receives, and the dividend is not a major portion of her income.

A company that earns a steady income is more likely to pay out high dividends. When the managers can easily predict the level of profit that the company will earn in future years, the company can pay out more money without risking a future cash shortage.

Managers' power over the company affects the company's dividend policies. If managers receive large bonuses for good performance or hold a high percentage of the company's shares, they typically prefer to reinvest the company's profits. If managers hold fewer shares and have fewer performance incentives, outside stockholders may ask for higher dividends as a safeguard because managers have less motivation to achieve high profits with the assets they manage.

Under the residual-dividend model, the company pays a dividend because it has no better use for its profits. The company subtracts the cash that it can invest in worthwhile activities from its total profits and returns the remaining cash to its investors. The company decides which activities are worthwhile by establishing a threshold rate, such as stating that it will only invest in a project that offers a7 percent return on its investment.

Economic conditions affect dividend policies. When the economy is performing badly, investors prefer greater dividends. If economic conditions are good and the stock market is rising, investors feel more confident about leaving their cash in the company, because the company has better prospects for growth and future income.

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Factors affecting the dividend policy: 

1 / legislation: 

Some companies are subject to the laws that govern dividend policy, which show that dividends must be paid from the profits realized or retained. These laws are based on three main rules are: 

i. Base net profit: clarifies that dividends can be paid from current or past profits. 

ii. Weak capital base: This protects lenders to prevent the payment of dividends from the capital. 

iii. Base insolvency: This rule clarifies that companies can not pay dividends at bankruptcy. 

There are some in the country's legislation requiring companies to contribute to keep a mandatory reserve a certain percentage of the net profits, these laws and regulations limit the freedom of the company's board in a report the size of dividends to shareholders. 

2 / liquidity situation: 

Requires the distribution of profits to shareholders provide liquidity may be the company's unrealized gains and abundant, but these profits were held back and used to finance the company's assets and the private companies that grow at high rates and use all sources of funding available to them to finance expansion and also some companies strapped liquidity in the stages of economic recession due to the low sales this limits the ability of companies to pay cash dividends. 

3 / restrictions loan agreements: 

It is possible to put the loan agreements that take the company management restrictions on the freedom to decide the distribution of profits, for the company to commit to schedule repayment of the loan and therefore, the net profits are used first to repay the loan installments due. The loan agreement required the company not to distribute any dividends to shareholders of profits realized by the company after taking the loan and may also prohibit the distribution of dividends to shareholders if the working capital fell below a certain level. 

4 / growth rates of the company: 

Whenever the company's rapid growth rate, the greater the need to finance the expansion of assets and thus the more likely the detention of the company's profits rather than distribute. 

5 / stability of revenue: 

The company, which is witnessing a relatively stable earnings often pay a higher proportion of dividends other than those that have a fluctuation in earnings vegan Board of Directors here heading towards the detention of a high percentage of the profits in the company in anticipation of the future. 

6 / dealing with the stock market: 

Small businesses suffer and new limited ability to borrow and finance by issuing shares and that because it is not well known by the banks and investors therefore moving towards the detention of a large proportion of the profits compared to companies large and old, which distributes earnings ratios largest shareholders. 

7 / Preferences existing shareholders: 

Play preferences of existing shareholders of the company plays an important role in determining the dividend policy, in companies owned by a small group of individuals have trend towards the detention of a large percentage of the profits, because shareholders may prefer to secure the financing needs of ownership by the detention of the profits instead of issuing shares so as not to lose control on the company and also if the rate of income tax to existing shareholders is high, they prefer to take profits and detention Aaúdhm in the form of capital gain because it is subject to the tax rate is lower.

Dividend is a distribution to shareholders out of profits or reserves available for this purpose.

Nature of Dividend Decision

The dividend decision of the firm is crucial for the finance manager because it determines: 

1. the amount of profit to be distributed among the shareholders, and 

2. the amount of profit to be retained in the firm. 

Factors Affecting Dividend Policy: 

1. External Factors 

2. Internal Factors 

the dividend policy  depends on the capital structure, growth ,share price movements , firm size, business risk, liquidity and profitability.

It depends upon factors such as ,

1) The nature of the business

2) The income returns of the company

3)The dividend to be distributed 

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Increasing the shareholders wealth

Income stability to cover 

A potential for better return through capital investment

Other method of returning capital to avoid dividend taxes

Legally requirements 

The economic condition