Dividend Decisions

Dividend Decisions

The third important decision of the firm is its dividend policy. The financial manger must decide how much to pay in the form of dividends and how much to retain or distribute all the profits. The dividend payment ratio must be evaluated in the light of the objective of the firm. If investors at margin are not indifferent in the current dividends and capital gains, there will be and optional dividend payment, ratio that maximize shareholders wealth. The value of dividend to investors must be balanced against the opportunity cost of retained earnings just as a means of equity financing. Further a financial manager has to consider the preferences of share holders, financial needs of the company, factors and constraints affecting the dividends cash or stock dividends.