DETERMINANTS OF DIVIDEND DECISIONS
The dividend policy is affected by the following factors:
1. Availability of funds: If the business is in requirement of funds, then retained earnings could be a good source. Since it saves the floatation cost and further the control will not be diluted as in case of further issue of share capital.
2. Cost of capital: If the financing requirements can be financed through debt (relatively cheaper source of finance), then it should be preferred to distribute more dividend but if the financing is to be done through fresh issue of equity shares, it is better to use retained earnings as much as possible.
3. Capital structure: An optimum Debt equity ratio should also be under consideration for the dividend decision.
4. Stock price: Stock price here means market price of the shares. Generally, higher dividends increase value of shares and low dividends decrease it.
5. Investment opportunities in hand: The dividend decision is also affected, if there are investment opportunities in hand, the company may prefer to retain more from the earnings
6. Internal rate of return: If the internal rate of return is more than the cost of retained earnings, it’s better to distribute the earnings as much as possible.
7. Trend of industry: Few industries have been seen by investors for regular income, hence in such cases, the firm will have to pay dividend for survival.
8. Expectation of shareholders: The shareholders can be categorised in two categories: (i) those who invests for regular income, & (ii) those who invests for growth. Generally, the investor prefers current dividend more than the future growth.
9. Legal constraints: Section 123 of the Companies Act, 2013 came into force from 1st April, 2014 which provides for declaration of dividend. According to this section:
(i) Dividend shall be declared or paid by a company for any financial year only:
(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of section 123(2), or
(b) out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or
(c) out of both; or
(d) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government.
10. Taxation: As per Section 115-O, dividend is subject to dividend distribution tax (DDT) in the hands of the company. Under the existing provisions of Section 10(34) of the Income Tax Act, 1961, dividend which suffer dividend distribution tax (DDT) under section 115-O is exempt in the hands of the shareholder.
Further, any income by way of dividend in excess of ` 10 lakhs shall be chargeable to tax in the case of an individual, HUF or a firm who is resident in India, at the rate of ten percent.
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