Dividend identifies the part of net income paid out to shareholders. It really is paid in cash and/or stock for making investment and bearing risk. Dividend decision of the company is another crucial section of financial management as it affects shareholders wealth and value of the company. The percentage of earning paid out in the form of cash dividend is known as dividend payout proportion.
A company may preserve some part of its earnings to fund new investment. The percentage of retained in the company is named retention proportion. Dividend policy is an integral area of the firm’s financing decision as it offers internal financing. Dividend policy can be involved with determining the percentage of firm’s earnings to be distributed by means of cash dividend and the portion of revenue to be maintained. 3. It can disperse a part of profits as dividend and wthhold the rest for reinvestment purpose.
When dividends are paid to the stockholders the firm’s cash is reduced. A company may decrease its dividend payout and use the retained funds to increase its capacity, to repay a few of its debt or even to increase investment. In this way, the firm’s dividend plan is closely related with the firm’s investment and financing decisions. Determining the part of revenue to be distributed as dividends is an integral decision that affects the value of firm’s common stock in the market place. Similarly, the retained cash flow are considered to be the most convenient internal source designed for financing … Read more