Explain the factors that influence the dividend policy

      

Explain the factors that influence the dividend policy

  

Answers


Kavungya
• Legal requirements-they can be classified as follows;-
i. The net profit rule which states that dividends can only be paid from the companies available profits.
ii. Insolvency rule which states that the company cannot pay dividends when its insolvent i.e. when total assets are less than liabilities.
iii. Capital requirement rule which prohibits payment of dividends from capital through sale of assets to raise money to pay dividends.
• Shareholders expectations-if the company shareholders are wealthy, in a high income bracket, they may prefer capital gains over dividends and therefore company may retain more funds.
• Bond covenants-these are terms and conditions of the loan agreement, the restrictions may restrict the company from paying dividends, unless earnings exceed a certain amount.
• Industrial norms – a company will adopt a dividend policy which is similar to its competitors in the industry that it operates.
• Profitability and liquidity position- companies’ ability to pay dividends will be determined by the ability to generate stable profits.
Kavungya answered the question on May 5, 2022 at 13:53


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