Factors determining dividend policy. What Are Key Factors That Influence Dividend Policies? 2023-01-04

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The BCG (Boston Consulting Group) matrix is a tool used by companies to evaluate their business units or product lines based on two dimensions: relative market share and market growth. The matrix divides the business units or product lines into four categories: stars, cash cows, dogs, and question marks.

Stars are business units or product lines that have a high market share in a growing market. These units or lines generate a lot of cash and are considered the main growth drivers of the company.

Cash cows are business units or product lines that have a high market share in a mature market. These units or lines generate a lot of cash, but they do not contribute to the growth of the company.

Dogs are business units or product lines that have a low market share in a mature market. These units or lines do not generate much cash and do not contribute to the growth of the company.

Question marks are business units or product lines that have a low market share in a growing market. These units or lines may have potential for growth, but they require a lot of investment to catch up with the competition.

Now, let's apply the BCG matrix to Reliance, a diversified conglomerate company in India.

Reliance has several business units and product lines, including telecommunications, retail, petrochemicals, and energy.

The telecommunications unit, Jio, can be considered a star. Jio has a high market share in the growing telecommunications market in India and has been a major growth driver for Reliance.

The retail unit, Reliance Retail, can be considered a cash cow. Reliance Retail has a high market share in the mature retail market in India and generates a lot of cash, but it does not contribute much to the overall growth of the company.

It is difficult to classify the petrochemicals and energy units as either dogs or question marks because these industries are subject to fluctuations in demand and prices. However, the petrochemicals unit may be considered a cash cow due to its high market share and cash generation, while the energy unit may be considered a question mark due to its low market share and potential for growth.

Overall, the BCG matrix can help Reliance identify its growth drivers and allocate resources accordingly. It can also help the company make strategic decisions about which business units or product lines to invest in and which ones to divest.

Factors Affecting Dividend Policy

factors determining dividend policy

ADVERTISEMENTS: But a growing firm which has only little access to the capital market will not be able to pay dividend often, because its financial needs cannot be completely met from the capital market. All the above factors must be carefully considered before formulating a dividend policy. Shareholder preference for current income versus capital gains Other factors are held constant; an investor will have a stronger choice for dividends if the tax rate on dividends is lower than capital gains. Composite Dividend: When dividend is paid partly in cash and partly in the form of property then it is known as composite dividend. Dividend payout ratio represents the percentage of dividend declared and paid out of the earnings per share.


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What Are Key Factors That Influence Dividend Policies?

factors determining dividend policy

Can profits be put to better use? Prima facie there appears to be a conflict between the two because in the case of company form of organisation, there is separation between ownership and control. Dividends may also be classified on the basis of medium in which they are paid: ADVERTISEMENTS: A company may pay dividend in different forms as follows: 1. The pay­ment of dividends cannot be made when the ratio of current assets to current liabilities decreases to some level, and iii. Equity Dividend: The dividend paid on equity shares is called Equity Dividend. As a result, the rate of dividend is affected.

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Determinants of Dividend Policy

factors determining dividend policy

Investors expect and demand companies to smooth dividend increases so that dividend cuts are relatively rare. For this purpose, a firm should follow a tax-oriented dividend policy by: i Not declaring dividends and assisting the shareholders to secure their returns by the sale of appropriated shares, ii Following a policy of regular share dividend in lieu of cash dividend, ADVERTISEMENTS: iii Using classified equity share dividend. Thus, unlike established companies, they have to follow a conservative policy that can pay higher dividends from their reserves. Outlook for Future Revenue Growth:Companies that anticipate stronger revenue growth in the near future often choose to distribute more money back to their shareholders through dividends rather than investing it back into the business. Few shareholders fulfill their income requirements by receiving dividend and to some extent by selling a portion of their shareholdings and earning what is called capital gains. Control : With cash being utilized to pay dividends, it may be necessary for a firm to look to the equity market for additional rupees of capital to finance future expansion. Hence, dividend policy may be framed in such a way that maximizes return for the shareholders by mitigating the tax expenses.

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What Is Dividend Policy?

factors determining dividend policy

A company has to pay a dividend compulsorily in the year of bonus issue because a bonus issue cannot be in lieu of cash dividend. As merger and acquisition need a huge outflow of cash, a moderate dividend can be expected from such a company. Top 500 BSE companies have been considered for the purpose of the study. Capital Market Access 18. Kuzucu 2015 examined the corporate dividend payout behaviors of non-financial firms from Istanbul Stock Exchange using survey method. One of them is the stock dividend.

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Factors determining the dividend policy of a company

factors determining dividend policy

But due to inflation, when the assets are to be replaced, there will be a wide variation between the funds set apart for that purpose with the market value. The earnings for institutional investors, will affect its dividends to its shareholders also. Simply put, a dividend policy reflects on the terms on which dividends of a company are to be paid out and at what frequency intervals. Other theories suggest that companies use their dividend policy to manage earnings per share EPS. .

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Dividend Policy: Introduction, Types, Policy, Theories, Factors

factors determining dividend policy

Companies are more cautious with the size and frequency of dividend increases when earnings are volatile. ADVERTISEMENTS: But Central Govt, is empowered to allow only in public interest any company to pay dividends for any financial year out of profits of the company without providing depreciation. Profit Rate: Another important consideration for deciding the dividend is the profit rate of the firm. In the second step multiple regression was done on the factors extracted. Financial Needs of the Company 4. Effect of Trade Cycle. Market reactions around Stock Splits and Bonus Issues: Some Indian evidence.

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Factors Determining Dividend Policy

factors determining dividend policy

These factors has a positive impact on the dividend pay-out ratio. Investment Opportunities: The availability or lack thereof of attractive investment opportunities is also something that should be taken into account when setting a dividend policy. Thus, stability in earnings plays a role in constructing the dividend policy of a firm. It is, therefore, required that adequate efforts should be made to keep the uniformity in dividends payable year-to-year. A dividend policy can also be revised in the wake of changes in any of the factors affecting dividend policy.

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Top 13 Determinants of Dividend Policy

factors determining dividend policy

If these shareholders are not interested in paying high rate of dividend then the company may declare a low rate of dividend. On the other hand, a low rate of corporate tax increases the profit available for distribution and hence the rate of dividend will be high. There is a positive relation between dividend policy of a firm and value of that firm that is payment of dividends affects the value increases of the firm. So the amount of dividends payable, is dependent on the terms and conditions accepted to the creditors. Baker and Powell 2000 adopted a primary survey method to analyse the dividend determinants.

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Factors Affecting Dividend Policy

factors determining dividend policy

However, to avail of the opportunity, the Company needs certain funds that can be used from retained earnings. As such, the dividend pay-out ratio tends to be low during the periods of inflation. Solution Correct Answer is A. Tax Implications: Shareholders are primarily concerned with the after-tax returns of their investments, company pays taxes on its earnings prior to any dividend distribution and investors receiving dividends do not pay taxes on dividend income. This refers to the difference between capital gains tax rate and income tax rate on current income.


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