question_answer

Sana is a young professional employed in a multinational company. Her annual package is of Rs. lakh. Since she lives with her parents, therefore she is able to save a major part of her earnings. Her friends are constantly advising her to invest in shares. But, she is not aware about the nitty-gritties regarding the functioning of the stock-exchange. So, she decided to invest in equity through the primary market, assuming that this will help her to earn stable dividends. But her father, who was a retired bank officer told her that even dividends are not stable as they are affected by several factors.

(i) Is Sana's father right in his assertion?

(ii) Explain the following as factors affecting 'dividend decision':

[a] Stability of dividend

[b] Legal constraints

[c] Access to capital market

[d] Growth opportunities

Answer:

(i) Yes, Sana's father is correct in his assertion. (ii) Factors affecting dividend decision are: [a] Stability of Dividend Every company adopts the policy of maintaining the stability of dividend share. From this point of view, a little change in profit should not be allowed to increase or decrease the dividend. [b] Legal Constraints Certain provisions of the Companies Act put restrictions on payouts as dividend. Such provisions must be adhered to while declaring the dividend. [c] Access to Capital Market Large and reputed companies generally have easy access to the capital market and therefore may be depended less on retained earnings to finance their growth. These companies tend to pay higher dividends than the smaller companies. [d] Growth Opportunities If the company has more opportunities for growth, it will require more finance. In such a situation, a major part of the income should be retained and a small part of it should be pad as dividend.