© examsnet.com
Question : 38
Total: 39
'Abhishek Ltd.' is manufacturing cotton clothes. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments.
It has taken a loan of ₹ 50 lakhs from I.C.I.C.I. Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement.
The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company.
Quoting the lines from the above discussion, identify and explain any four such factors.
It has taken a loan of ₹ 50 lakhs from I.C.I.C.I. Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement.
The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company.
Quoting the lines from the above discussion, identify and explain any four such factors.
Solution:
As per the question, the decision that is discussed above is 'dividend decision'.
The following are the factors that affect the dividend decision:
Quote 1. "It has been consistently earning good profits for many years."
Factor-stability of earnings: When a company has a stable and a smoothearning, it is in a position to distribute higher dividends as compared to the companies who have an unstable earning. In other words, a company having consistent and stable earnings can distribute higher amount of dividends.
Quote 2. "This year too, it has been able to generate enough profits."
Factor-Amount of earnings: A firm pays dividends out of its current and past earnings. This implies that earnings play a key role in the dividends decision. A company having higher earnings will be in a position to pay a higher amount of dividend to its shareholders. In contrast to this, a company having low or limited earnings would distribute low dividends.
Quote 3. "There is availability of enough cash in the company and good prospects for growth in future."
Factor-Growth prospects: Companies aiming for a higher growth level or expansion of operations retain a higher portion of the earnings with themselves for reinvestment. Thus, the dividends of such companies are smaller as compared to the companies with lower growth opportunities.
Quote 4. It has many shareholders who prefer to receive a regular income from their investments."
Factor-Preference of the shareholders: A company must keep in mind the preferences of the shareholders while distributing the dividends. For instance, if the shareholders prefer as least a certain amount of dividend, then the company is likely to declare the same.
The following are the factors that affect the dividend decision:
Quote 1. "It has been consistently earning good profits for many years."
Factor-stability of earnings: When a company has a stable and a smoothearning, it is in a position to distribute higher dividends as compared to the companies who have an unstable earning. In other words, a company having consistent and stable earnings can distribute higher amount of dividends.
Quote 2. "This year too, it has been able to generate enough profits."
Factor-Amount of earnings: A firm pays dividends out of its current and past earnings. This implies that earnings play a key role in the dividends decision. A company having higher earnings will be in a position to pay a higher amount of dividend to its shareholders. In contrast to this, a company having low or limited earnings would distribute low dividends.
Quote 3. "There is availability of enough cash in the company and good prospects for growth in future."
Factor-Growth prospects: Companies aiming for a higher growth level or expansion of operations retain a higher portion of the earnings with themselves for reinvestment. Thus, the dividends of such companies are smaller as compared to the companies with lower growth opportunities.
Quote 4. It has many shareholders who prefer to receive a regular income from their investments."
Factor-Preference of the shareholders: A company must keep in mind the preferences of the shareholders while distributing the dividends. For instance, if the shareholders prefer as least a certain amount of dividend, then the company is likely to declare the same.
© examsnet.com
Go to Question: