Page 217 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes few investment opportunities adopts high dividend payout ratio policy (that low retention)
because owners can reinvest dividends elsewhere at higher rate of return then the firm can
do, and nominal retention of profit is required to replace the modernize firm's assets.
9. Access to the Capital Market (External Sources): Access to the capital market means the
firm's ability to raise funds from the capital market. A company, which has easy access to
the capital market provides that flexibility in deciding dividend policy. Easy access is
possible only to the companies that are well established and hence here a profit track
record. Generally dividend policy and investment decisions are interrelated, but in this
situation they are independent. The management may tempt to declare a high rate of
dividend that attract investors and maintain existing shareholders.
On the other hand, a firm that has difficulty in accessing capital market to raise required
funds, will not be able to pay more dividends. It has to depend on internal funds, so
management should follow a conservative dividend policy by maintaining a low rate of
dividend and plough back a sizeable portion of profits to face any contingency. Likewise,
the lending financial institutions advance loans in stiffer terms, it may be desirable to rely
on internal sources of financing and accordingly conservative dividend policy should be
pursued.
10. Control Objective: Control over the company is also an important factor, which influences
dividend policy. When a firm distributes more earning as dividends in the form of cash it
reduces its cash position. As a result, the firm will have to issue shares to the public to raise
funds required to finance investment opportunities that leads to loss of control, since, the
existing shareholders will have to share control with new owners. Financing investment
projects by way of internal source avoids, loss of control. Hence, if the shareholders and
management of the firms are reluctant to dilution of control, thus the firm should retain
more earnings for investment programmes, by following conservative dividend policy.
11. Inflation: Inflation is the state of economy in which the prices of products or goods have
been increasing. Inflation is a factor that influences dividend policy indirectly. Indian
accounting system is based on historical costs. The funds accumulated from depreciation
may not be sufficient to replace the absolute asset or equipment, since depreciation is
provided based on historical costs. Consequently, to replace assets and equipment, firm
has to depend upon retained earnings, this leads to the payment of low dividend, during
inflation period.

12. Dividend Policy of Competitors: Keeping one eye on competitors' dividend policy is very
important. If the firm wants to retain the existing shareholders or it want to maintain
share price in the market, and if it is planning to raise funds from public for expansion
programs, it has to pay dividends at par with its competitors. Hence, it is one of the factors
that influence dividend policy of a firm.
13. Past Dividend Rates of the Company: This is the factor that influences the dividend policy
of an existing company (that has already paid dividends). Owners' and prospective investors
prefer stability in dividends. Stability of dividends means the payment of dividend
regularly, at a constant dividend per share (it may be a fixed percentage on book value or
a fixed percentage on earnings available to equity shareholders). Generally firms' tries to
maintain stability in dividends that is based on past dividend rates of the company.
Hence, directors will have to keep in mind the past dividend rates.
14. Others: Apart from the above discussed, there are some other factors, which influence
dividend policy of a firm, such as Trade Cycles, Corporate taxation policy, attitude of
investors group and repayment of loan.

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