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Explain the factors that finance managers should analyze before making a dividend decision.

Explain the factors that finance managers should analyze before making a dividend decision.

Answers

-Liquidity of each firm – The more liquid the firm, the higher the dividends other things constant.
-Tax position of shareholders e.g shareholders with low income from other sources will prefer high
dividends to supplement their income.
- Profitability of the firm – Other factors constant, the higher the profits, the higher the dividends.
- Bond/debt covenants e.g restrictions of payment of dividends from retained earnings.
- Availability of investment opportunities – The more the projects yielding a positive NPV the
higher the retained earnings and the lower the dividends.
- Access the capital markets e.g firms which can easily and cheaply secure debt capital can afford
to pay high dividends and vice versa.
- Capital structure decisions – If the firm wants to reduce gearing through increase in equity,
retained earnings will be increased thus lower dividends paid.
- Level of business risk – Firms with high volatility of earnings will generally pay low dividends
(other factors constant) due to uncertainty of profits and reduced ability to borrow.
- Shareholders expectations – If shareholders have been receiving increasing DPS, the firm
would persist on this trend since any reverse trend may affect the market value of shares.

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Kavungya answered the question on April 16, 2021 at 13:40

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