Management of Dividend Decisions
This function of concerned with the allocation of net profits. A firm has following three choices :
(i) Distribution of net profits in the form of dividends to shareholders;
(ii) Distribution of net profits to employees in profit sharing plans shareholders; and
(iii) Retention of profits for future expansion of business of the firm.
There is conflict between the first two choices and the third choice. The financial manager performes a very important function when he decided about the portion of the net profits which should be retained in the business and the portion of net profits which should be distributed. His, this decision influences the value of the firm. While performing this function he has to consider the relevant law and rules, the liquidity position, the need of repaying loans, terms and conditions of long term loans already secured and to be secured, rate of growth in assets, need of maintaining stability in earnings. of reaction capital, tax position of shareholders etc. The function of management of income requires through analyses all these factors. Decisions relating to dividend may be of following types :
(i) dividend pay-out ratio (i.e., dividend paid as percentage of total net profits).
(ii) stability of dividends over a period of time, and
(iii) dividends in the form of shares.
Dividend decisions are immediately related to financing decisions in the sense that they determine the total amount of internal financing (account of retained earnings).
The financial manager has to lay down the procedure of payment of divided and administer its implementation. For determining the optimal dividend pay-out ratio, a financial manager has to study (a) the preference of marginal investors for current dividends and for capital appreciation exhibited by market price of shares; (b) the impact of retained earning of capital structure (debt-equality ratio) and (c) the impact of decisions relating to retained earnings on weighted average costs of capital. The financial manager has to strike a balance between the value of dividends and the opportunity cost of retained earnings from the point of view of investors (shareholders).