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


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


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