Question

Explain the following factors affecting the dividend decision of a company: (i) Growth opportunities (ii) Cash flow position (iii) Shareholders’ preference

Hint:

Working capital and dividend decisions are crucial to maintain liquidity and shareholder trust. Short cycles, raw material access, and stable cash flows keep the business running smoothly.

Answer 1

(i) Growth opportunities: If a company has profitable investment opportunities, it may retain earnings to fund expansion instead of paying dividends. Firms with high growth prospects usually offer lower dividends. (ii) Cash flow position: Even if profits are high, a poor cash flow may restrict the company’s ability to pay dividends. Dividend payment depends on liquidity, not just profitability. (iii) Shareholders’ preference: If shareholders prefer regular income, companies may be inclined to distribute a higher dividend. In case shareholders favor capital appreciation, lower dividends may be declared with higher retained earnings.