Question

VK Ltd. is a fast-moving consumer goods company. It has shareholders spread all over India. Most of its shareholders depend upon a regular income from their investment. VK Ltd. has been earning consistent profits. The management of the company keeps in mind the preference of the shareholders regarding the payment of dividends. Since its shareholders, in general, desire that at least a certain amount is paid as a dividend to them every year, the company declares a dividend every year. Atul, the Finance Manager of the company identified promising growth opportunities. He suggested to the Chief Executive Officer to retain the earnings to finance the required investments instead of declaring a dividend every year. For this, the Chief Executive Officer decided to call a General Body Meeting of the shareholders.
(i) Identify two factors affecting the dividend decision discussed above.
(ii) State two other factors that affect the dividend decision of a company.

Hint:

Dividend decisions are influenced by various factors like shareholder preferences, profitability, growth opportunities, and liquidity.- Companies must balance between rewarding shareholders with dividends and reinvesting earnings for future growth.- A good dividend policy aligns the interests of the company with those of its shareholders and supports long-term business objectives.

Answer 1

(i) Two Factors Affecting the Dividend Decision:
1. Preference of Shareholders: The shareholders of VK Ltd. depend on regular income from their investment, so they prefer that the company declares dividends every year. This is an important factor in deciding the dividend payout.
2. Growth Opportunities and Investment Needs: Atul, the Finance Manager, identified promising growth opportunities, suggesting that retaining earnings might be better than paying dividends to fund investments, thus affecting the dividend decision.

(ii) Two Other Factors Affecting the Dividend Decision:
1. Profitability of the Company: Companies with high and consistent profits are more likely to declare higher dividends, while companies with unstable or lower profits may retain earnings for growth.
2. Liquidity Position: The company must ensure that it has sufficient liquidity to pay dividends. Even if the company is profitable, it may choose to retain earnings if liquidity is a concern.