Answer to Question #223938 in Finance for Andrick Angel

Question

Why is the dividend decision one of the major areas that a finance manager should pay particular attention to? What considerations must be taken into account when setting a dividend policy of a company? (12 marks

Answer 1

Dividend is the distribution of some of a company's earnings to a class of it's shareholder as determined by the company's board of directors.

The financial manager should pay attention to dividend decision because he\she must determine if generated earnings will be reinvested in the company to improve the operations or if they will be distributed among shareholders.

Considerations are;

1. Ability to borrow_the company have to borrow from the market, well established and large firms have better access to the capital market than new and small firms hence they can pay higher rate of dividend.

2. Stability of earnings _ if earnings are relatively stable, a firm is in a position to predict what it's future earnings will be.

3. Dividend policy _ it concerns how much of the company's earnings will be paid out of shareholders. However, if dividends disrupted are too high, the company may encounter limitations to expand or improve the management of it's operations.

4. Financing policy _ the financial manager must define several aspects of the financing strategy for example study the sources willing to offer credit to the organization. The financial manager can also design a mixed financing strategy for efficient financial management.