Page 218 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 9: Dividend Decisions

Self Assessment Notes

State whether the following statements are true or false:
5. Dividend decision involves legal as well as financial considerations.
6. Capital impairment rule says that dividends can be paid from capital.
7. Sec 205 of the Companies Act , 1956 says that dividends can be declared only from current
year's profits or from past reserves after providing depreciation.
8. Payment of dividend is prohibited when the firm is insolvent.
9. Stock dividend affects the liquidity position of the firm.
10. There is no relation between financing decisions and dividend decision.

11. Management of earnings has nothing to do with retention of profits.
12. Ploughing back of profits is the same as self-financing.
13. Bonus issue amounts to reduction in the amount of accumulated profits and reserves.
14. Reduction in the number of outstanding shares is known as reverse split.

9.5 Forms of Dividends

Dividend is the portion of earnings available to equity shareholders that equally (per share
bias) is distributed among the shareholders. General practice is to pay dividends in cash, this
form may take place when the cash is available or during liquidity of the company. Sometimes
firms may declare dividends in the form of Scrip, bond, stock and property dividends. The
following discussion deals with the different forms of dividends:
1. Cash Dividend: Generally many companies pay dividends in the form of cash. But payment
of dividend in the form of cash requires enough cash in the bank or in hands. In other
words, there should not be any shortage of cash for payment of dividends. Sufficient cash
is available only when a company prepares cash budget to estimate the required amount
for the period for which the budget is prepared. If the company finds any shortage of cash,
it should make arrangements to borrow funds. But it may be difficult to prepare a cash
budget with the expected amount needed for payment of dividends.
2. Scrip Dividend: In this form of dividends, the equity shareholders are issued transferable
promissory notes for a shorter maturity period that may or may not be interest bearing.
It is a simple payment of dividends in the form of promissory notes. Payment of dividend
in this form takes place only when the firm is suffering from shortage of cash or weak
liquidity position.

Notes Payment of dividends in the form of cash is justifiable only when the company has
earned profits and it will take some time to convert current assets into cash.

3. Bond Dividend: Both scrip dividend and bond dividend are same, but they differ in terms
of maturity. Bond dividends caries longer maturity whereas, scrip dividend has shorter
maturity. The effect of both forms of dividends on the company is the same. Bond dividend
bears interest.
4. Property Dividend: The name itself suggests that payment of dividend takes place in the
form of property. In other words, payment of dividends in the form of assets. This form of

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