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Factors Determining Dividend Policy


Profitable Position of the Firm

Dividend decision depends on the profitable position of the business concern. When the firm earns more profit, they can distribute more dividends to the shareholders.

Uncertainty of Future Income

Future income is a very important factor, which affects the dividend policy. When the shareholder needs regular income, the firm should maintain regular dividend policy.

Legal Constrains

The Companies Act 1956 has put several restrictions regarding payments and declaration of dividends. Similarly, Income Tax Act, 1961 also lays down certain restrictions on payment of dividends.

Liquidity Position

Liquidity position of the firms leads to easy payments of dividend. If the firms have high liquidity, the firms can provide cash dividend otherwise, they have to pay stock dividend.

[Post Image Courtesy of JK1991 at FreeDigitalPhotos.net]

Sources of Finance

If the firm has finance sources, it will be easy to mobilise large finance. The firm shall not go for retained earnings.

Growth Rate of the Firm

High growth rate implies that the firm can distribute more dividend to its shareholders.

Tax Policy

Tax policy of the government also affects the dividend policy of the firm. When the government gives tax incentives, the company pays more dividend.

Capital Market Conditions

Due to the capital market conditions, dividend policy may be affected. If the capital market is prefect, it leads to improve the higher dividend.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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