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Question
Explain the following as factor affecting dividend decision:
Stability of earnings
Solution
Stable Earnings: A company with stable and smooth earnings can pay higher dividends to shareholders than a company which has unstable and uneven earnings.
RELATED QUESTIONS
'Mission Coach Ltd.' is a large and creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries and decides to invest in
new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.
1) Name and explain the money-market instrument the company can use for the above
purpose
2) What is the duration for which the company can get funds through this instrument?
3) State any other purpose for which this instrument can be used.
'Abhishek Ltd'. is manufacturing cotton clothes. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is the availability of enough cash in the company and good prospects for growth in future. It is a well-managed organisation 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 50 lakhs from I.C.I.C.I. Bank and is bound by certain restrictions on the payment of dividend according to the terms of the 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.
Explain the following as factor affecting dividend decision:
Growth opportunities
Explain the following as factor affecting dividend decision:
Cash flow position
Explain the following as factor affecting dividend decision:
Shareholder's preferences
Explain the following as factor affecting dividend decision:
Access to capital market
Explain the following as factor affecting 'financing decision'.
Cash flow position of the business
Explain the following as factor affecting 'financing decision'.
Control consideration
Explain the following as factor affecting 'financing decision'.
State of capital markets
Give the meaning of ‘Investment’ and ‘Dividend’ decisions of financial management.
What is ‘Financial Risk?’ Why does it arise?
Explain the factors affecting the dividend decision.
| Ananta Ltd. is a company dealing in ready-made garments for the last many years. Recently the profit of the company has started increasing. The finance manager decided to retain the profit instead of distributing it among shareholders. |
- Identify and state the financial decision taken by the finance manager in the above case.
- State any three factors affecting the decision identified in (i) above.
| Ravi has joined as a finance manager at MTA Ltd. He had to arrange funds of rupees one crore for the company. The Chief Executive Officer of the company wants to arrange the funds by a public issue whereas the finance manager wants to have a mix of debt and equity as this will determine the overall cost of capital and the financial risk of the enterprise. |
- Identify and give the meaning of the financial decision suggested by the finance manager in the above case.
- State any three factors affecting the decision identified in (i) above.
Identify the financial decision that is concerned with deciding how much of the profit earned by a company is to be distributed to shareholders and how much should be retained in the business. Also state any three factors affecting the identified decision.
