Unit 9

Financial Management is concerned with the management of the flow of funds and involves
decisions related to the acquisition and application of funds in long-term and short-term assets.
It is concerned with two aspects, they are procurement of funds and usage of finance.
Financial decision refers to the decision related to financial matters of a business firm. There
are various financial decisions that the firm makes to maximize shareholders’ wealth. There are
three major decisions that every financial management takes investment decision, financial
decision, and dividend decision.

Dividend Decision
The dividend is that portion of the profit that is distributed to the shareholders. The decision
involved here is how much of the profit earned by the company after paying the taxes is to be
distributed to the shareholders. It also includes the part of the profit that should be retained in
the business. When the current income is re-invested, the retained earnings increase the firm’s
future earning capacity. This extent of retained earnings also influences the financing decision
of the firm. The dividend decision should be taken keeping in view the overall objective of
maximizing shareholders’ wealth.
Factors affecting Dividend Decision

There are various factors that affect the dividend decision. These are as follows:
 Amount of Earnings: Dividends are paid out of the current and previous year’s
earnings. More earnings will ensure greater dividends, whereas fewer earnings will lead to
the declaration of a low rate of dividends.

 Stability of Earning: A company that is stable and has regular earnings can afford to
declare higher dividend as compared to those company which doesn’t have such stability in
earnings.
  Stability of Dividend: Some companies follow the policy of playing a stable dividend
because it satisfies the shareholders and helps in increasing companies reputation. If earning
potential is high, it is declared as a high dividend, whereas if the earning is temporary or not
increasing, then it is declared as a low or normal dividend.

 Growth Opportunities: Companies with growth opportunities prefer to retain more

money out of their earnings to finance the new project. So, companies that have growth
prospects in near future will declare fewer dividends as compared to companies that don’t
have any growth plan.

 Cash flow Position: Payment of dividends is related to the outflow of cash. A company
may be profitable, but it may have a shortage of cash. In case the company has surplus cash,
then the company can pay more dividends, but during a shortage of cash, the company can
declare a low dividend.

 Taxation Policy: The rate of dividends also depends on the taxation policy of the
government. In the present taxation policy, dividend income is tax-free income to the
shareholders, so they prefer higher dividends. However, dividend decision is left to
companies.

 Stock market reaction: The rate of dividend and market value of a share are directly
related to each other. A higher rate of dividends has a positive impact on the market price of
the shares. Whereas, a low rate of dividends may hurt the share price in the stock market.
So, management should consider the effect on the price of equity shares while deciding the
rate of dividend.

What are the different types of dividends?

Dividends can take several forms: cash (paid in currency), stock (paid in company shares),
property (paid in company assets), liquidating (paid during company liquidation), and special
(non-recurring distributions).

Here's a more detailed look at these different types of dividends:

 Cash Dividends:
These are direct payments to shareholders in the form of cash, typically paid out quarterly or
annually.
 Stock Dividends (Bonus Shares):
These involve a company distributing additional shares to its existing shareholders rather than
cash.
 Property Dividends:
In this case, a company distributes its tangible assets (like real estate, equipment, or other
property) to its shareholders.
 Liquidating Dividends:
 These occur when a company is dissolving and distributing its remaining assets to shareholders,
representing a return of capital rather than a profit distribution.

 Special Dividends:
These are non-recurring or "one-time" dividends, paid to shareholders when a company
experiences a windfall profit or for some other specific reason.
 Interim Dividends:
These are dividend payments made by a company before the annual financial statements are
released, and they are paid out of retained earnings from previous fiscal years.
 Preferred Dividends:
These are dividends issued to the preferred stock owners, usually accruing a fixed amount that
is paid quarterly.