Question

Explain the following factors affecting dividend decision:

Hint:

A strong cash flow allows for higher dividends, while companies focusing on growth often retain earnings to fund future investments.

Answer 1

(i) Cash flow position:
The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for the declaration of dividend.
(ii) Growth opportunities:
Companies having good growth opportunities retain more money out of their earnings to finance the required investment. The dividend in growth companies is, therefore, smaller than that in non-growth companies.