‘Sarah Ltd.’ is a company manufacturing cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is an availability of enough cash in the company and good prospects for growth in future. It is a well-managed organization and believes in quality, equal employment opportunities, and good remuneration practices.
It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of Rs.40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan in agreement.
The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company.
Quoting the lines from the above discussion identity and explain any four such factor.
Dividend Decision: It refers decisions related to the amount of profit to be distributed among shareholders and amount of profit to be retained in the business for further growth of the business.
Factors Affecting Dividend Decision:
- Stability of Earnings: It affects dividend decision as a company having stable earnings is in a position to declare higher dividends.
- Cash Flow Position: A good cash flow position is necessary for declaration of dividend. ‘There is availability of enough cash in the company’.
- Growth prospects: If a company has good growth opportunities, it pays out fewer dividends. ‘Good prospects for the growth in the future’.
- Shareholders’ Preferences: Shareholders’preference is kept in mind by the management before declaring dividends. ‘It may have shareholders who prefer to receive regular income from their investments’.
