Afm

1. NAME:- SHUBHAM D JAGTAP
DIVISION:- FINANCE B
ROLL NO:- FB-317
SUBJECT:- ADVANCED FINANCIAL
MANAGEMENT (AFM)
TOPIC:- “FACTORS INFLUENCING DIVIDEND
POLICY”

2. WHAT IS DIVIDEND POLICY…?
 Dividend policy is the policy that the company adopts
for paying out the dividends to the company’s
shareholders, which includes the percentage of the
amount at which the dividend is to be paid out to the
stockholders and how frequently the amount is paid to
the company.
 A dividend policy is a set of guidelines or rules that the
company frames for distributing dividends in years of
profitability. It enhances an investor’s confidence
during the dividend’s distribution. Generally, listed
companies draft their dividend policies and keep them
on the website for the investors.

4. FACTORS AFFECTING THE DIVIDEND POLICY OF
THE COMPANY…
 1) Financing Needs of the Company
The Company may have some strong investment
opportunities available to them. However, to avail of the
opportunity, the Company needs certain funds that can be
used from retained earnings.
 2) Retained earnings
 If the Company has sufficient retained earnings, it can
pay a higher dividend to the shareholders. Usually,
companies are expected to pay a dividend with the
retained earnings or the profit for the current year.
If the Company has lower profitability in the current year,
it can still afford to pay the dividend from retained
earnings.

5.  3) Expectations of the Shareholders
 The concept of the clientele effect is strongly applicable
to the company’s dividend policy as some investors may
belong to a clientele of the shareholders who want to get
regular dividends as their day-to-day expenses depend on
the stream of dividend income.
On the other hand, some shareholders want a capital
appreciation of the shares, which is possible when the
Company does not pay a dividend and reinvests the same.
So, the share price can increase.

6.  4) Inflation
 If the Company operates in an economy of higher inflation, it
needs more financial resources to survive and execute its
operations.
For instance, with increasing inflation cost of working capital
increases, and the Company needs to maintain the threshold of
the reserves. So, it can’t afford a higher payout in an
inflationary environment and need to lower the dividend
payout.
 5) Liquidity
 The Company may have massive profitability yet struggle to
pay for the operating expenses on a timely basis. This may be
due to inefficient management of the working capital.
For instance, some big receivables of the Company may be
stuck for a long time and creating problems in the availability of
cash resources.

7.  6) Contractual Constraints
 While granting loans to a company, sometimes, the
lender may impose certain restrictions on the payment
of dividends in the future. The companies are required
to ensure that the dividend payout does not violate the
terms of the loan agreement in this regard.