How do you envisage your role as a finance Manager in matters related
to dividend policy? What are the alternatives and factors that you may consider before finalizing your views on dividend policy?
Ans. Role of finance Manager in Dividend Policy
Any organization aims to earn more and more profits. Financial decision involves the decision regarding the utilization of profits as whether the profits or reinvested in the business or distributed as dividends among shareholders
Corporate management main objective is the maximization of market value of organization, that is wealth. It is the function of financial manager to decide how to use profits as a financial manager, I will play an important role in advising the management. But the decision is always taken by board of directors only. The retention of profits in business helps the company in order to mobilize funds for expansions. According to Economists, the entire earnings of a business should be paid to its owners. As a finance managers, following decisions would be analysed.
(a) I will analyze existing dividend policy in terms of its effect on the value of the company.
(b) I would have to avoid erratic and frequent changes in dividends. If the rate of dividends. If the rate of dividend is reduced it will effect shareholders only.
(c) A workable compromise is to treat dividends as a long run residual to avoid undesirable variations in payout. This needs financial planning over a fairly long time horizon
(d) I will follow all the rules and regulations to advice dividend policy. I shall also communicate clearly to investors who may then take decisions in terms of their own preferences and needs
(e) I would also advice whether equal amount or a fixed percentage of dividend be paid every year, that is, stable dividend Also, whether a fixed percentage of total earnings be paid as dividend which would mean varying amount of dividend per share every year i.e, a fixed payout ratio. To decide whether the dividend be paid in cash or as property dividend or bonus shares dividend.
Factors before finalizing views on dividend policy
Factors that would effect dividend policy decisions are as follows:-
(a) Ownership Considerations
Where ownership is concentrated in few people, ownership interests can be easily identified But when people are large, the identification of interests become difficult. Interests of shareholders to encourage market acceptance of the stock as:-
(i) Current income needs of stock holders
(ii) Tax matters affecting stock holders
The objective of the maximization of the market value of shares
requires that the dividend policy be geared to investors in general
(b) Firm-oriented considerations
Firm-oriented considerations would include:-
· Business cycles
· Contractual and legal restrictions
· Risk of losing control of organization
· Post dividend policies and stock holders relationships
· Future expansion
(c) Nature of Business
To decide a dividend policy, nature of business has to be considered companies which do not have stable earnings adopt different dividend policies Consumer goods industries pay dividends on the regular basis
only.
(d) Attitudes and objectives of management
Some organizational may be niggardly in dividend payments whereas take it liberally. the attitude of management also affects it can easily declare dividends. In case, company has an objective to expand the business, it will never declare objectively dividend. They may consider ploughing back of earnings also
(e) Investment opportunities
Several organizations retain profits and reuse them to expand their business. The company which have low credit ratings may not be able to sell their securities to raise finance. They retain the profits company always look at the investment opportunities before deciding dividend policy.
(f) Desire for financial solvency and liquidity
Some companies wish to retain cash with them to meet necessary requirements cash credit limits, working capital requirements, repayment of long-term debt etc. always influence the dividend decision.
(g) Inflation
Inflation means increase in price in the economy. During inflation, funds generated from depreciation may not be adequate to replace an equipment or machine. The dividend payout ratio will be low. Inflation also affects profits of the company. In such situation, current income becomes important and shareholders want dividend out of it this includes a higher pay out ratio.
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