'Sarah Ltd.' is a company manufacturing cotton yarn. It has been consistently earning good profits for many years.
'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 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 lakh from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan 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 identify and explain any four such factors.
1 Answers
Factors affecting dividend decision:
(i) Stability of earnings:
'It has been consistently earning good profits for many years.'
Stability of earnings affects dividend decision as a company having stable earning is in a position to declare higher dividends.
(ii) Cash flow position:
'There is availability of enough cash in the company.'
A good cash flow position is necessary for higher declaration of dividend.
(iii) Growth prospects:
'Good prospects for growth in the future.'
If a company has good growth opportunities, it pays out less dividend.
(iv) Shareholder's preference:
'It has many shareholders who prefer to receive regular income from their investments'.
Shareholder's preference is kept in mind by the management before declaring dividends.
(v) Contractual constraints:
'It has taken a loan of Rs.40 lakh from IDBI and...... agreement’.
While taking dividend decision, companies keep in mind the restrictions imposed by the lenders in the loan agreement.