Page 229 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes first maximization of shareholders' wealth and second providing sufficient funds to finance
growth. There is a need to consider the factors that affect the dividend policy. They are: (1)
Nature of earnings, (2) Age of company, (3) Liquidity position of the company, (4) Equity
shareholders preference for current income, (5) Requirements of institutional investors,
(6) Legal rules, (7) Capital impairment rule, (8) Contractual requirements,
(9) Financial needs of the company, (10) Access to the capital market (external sources),
(11) Control objective, (12) Inflation, (13) Dividend policy of competitors, (14) Past dividend
rates of the company, and (15) others that includes - Trade cycles, corporate taxation
policy, attitude of investors group and repayment of loan.

9.8 Keywords

Dividend: It refers to that portion of company's net earnings that is paid out to the equity
shareholders.
Dividend Policy: It decides the portion of earnings to be paid as dividends to ordinary shareholders
and what portion is ploughed back in the firm for investment purpose.

Payout Ratio: The ratio of dividend to earnings is known as payout ratio.
9.9 Review Questions

1. Compare between bonus share and stock split.
2. Explain the reasons for stock split.
3. What is free reserve?
4. Describe the process to compute net earnings.

5. Discuss the dividend policy and its importance.
6. Describe the different types of dividend policies.
7. Explain the concept of scrip dividend.

8. Discuss Bond dividend.
9. What is stable dividend policy? Discuss the different forms of stable dividend policy.
10. List the advantages and disadvantages of stock dividend.
11. 'Payment of dividend involves legal considerations'. Discuss.
12. 'Stock dividends are unfair to those stockholders who desire cash income'. Comment.

13. What is stock split? Why is it used? How is it different from a bonus share?
14. Comment-'Bonus shares represent simply a division of corporate pie into a large number
of pieces'.

15. What is stock dividend? Discuss the advantages of stock dividend to the company.

Answers: Self Assessment

1. Net earnings 2. Value
3. Long-term finance 4. Stable dividend
5. True 6. False

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