Dividend Decision: This decision is concerned with distribution of surplus funds. The profit of the firm is distributed among various parties such as creditors, employees, shareholders, debenture holders etc. Under this decision the finance manager decided how much to be distributed in the form of dividend and how much to keep aside as retained earnings.
Factors affecting dividend decision: A firm's dividend policy is influenced by the large numbers of factors. Some factors affect the amount of dividend and some factors affect types of dividend. The following are the some major factors which influence the dividend policy of the firm.
1. Legal requirements: There is no legal compulsion on the part of a company to distribute dividend. However, there certain condition imposed by law regarding the way dividend is distributed.
2. Firm's liquidity position: Dividend payout is also affected by firm's liquidity position. In spite of sufficient retained earnings, the firm may not be able to pay cash dividend if the earnings are not held in cash.
3. Repayment need: A firm uses several forms of debt financing to meet its investment needs. These debts must be repaid at the maturity. If the firm has to retain its profits for the purpose of repaying debt, the dividend payment capacity reduces.
4. Expected rate of return: If a firm has relatively higher expected rate of return on the new investment, the firm prefers to retain the earnings for reinvestment rather than distributing cash dividend.
5. Stability of earning: If a firm has relatively stable earnings, it is more likely to pay relatively larger dividend than a firm with relatively fluctuating earnings.
6. Access to the capital market: If a firm has easy access to capital markets in raising additional financing, it does not require more retained earnings. So a firm's dividend payment capacity becomes high.
