Dividend Decision Detailed Notes for UGC-NET Commerce Examination (2024)

FAQs

What is the difference between retained earnings and dividend decision? ›

Retained earnings represent the accumulation of all of the earnings that a company has earned and not distributed to its shareholders (owners) since the business started. Dividends are declared by a company's Board of Directors and paid to shareholders shortly after.

Issues in Dividend Decisions

Sustainability: The firm needs to ensure that the dividend policy is bearable in the long run. Earnings Stability: Fluctuating earnings can confuse the dividend decision. Growth Opportunities: Firms with high growth prospects may prefer retaining profits for reinvestment.

It is the decision about how much of earnings to pay out as dividends versus retaining and reinvesting earnings in the firm. Dividend policy must be evaluated in light of the objective of the firm namely, to choose a policy that will maximize the value of the firm to its shareholders.

If the company is wrapping up its operations, then it can make dissolution or liquidation dividend payments to shareholders regardless of the condition of its balance sheet. Still, in the vast majority of cases, companies can't pay dividends that exceed their retained earnings.

Retained earnings are the portion of a company's cumulative profit that is held or retained and saved for future use. Retained earnings could be used for funding an expansion or paying dividends to shareholders at a later date.

You'll find these in a company's 10-K annual report. Here is the formula for calculating dividends: Annual net income minus net change in retained earnings = dividends paid.

Dividend Formula:

Dividend = Divisor x Quotient + Remainder. It is just the reverse process of division. In the example above we first divided the dividend by divisor and subtracted the multiple with the dividend. That means, we first divided and then subtracted.

Dividend Yield is calculated by dividing the annual dividend per share by the current market price per share, and then multiplying by 100 to express it as a percentage. The formula is: Dividend Yield = (Dividend per Share / Current Market Price per Share) * 100.

There are various factors affecting the dividend decisions of firms carefully assessed. Profitability, cash flow, financial health, growth options, industry norms, legal and regulatory needs, and shareholder preferences all play an important role in shaping dividend policies.

Why is dividend decision called residual decision? ›

The dividend decision are known a the residual decisions as they are taken only after the payment of the fixed assets by the company and keeping a potion of the profits as retained earnings. That is, dividends are decided only after meeting the financial and other obligations of the company.

A greater demand for a company's stock will increase its price. Paying dividends sends a clear, powerful message about a company's future prospects and performance, and its willingness and ability to pay steady dividends over time provides a solid demonstration of financial strength.

Dividends, whether cash, property, or stock, shall be declared out of unrestricted retained earnings of the corporation. Accordingly, a corporation cannot declare dividends when it has zero or negative retained earnings otherwise known as Retained Earnings Deficit.

Preferred dividends are typically paid out to shareholders who hold preferred stock in a company. Unlike common dividends, which are paid out of a company's retained earnings, preferred dividends are typically paid out of the company's current earnings or accumulated earnings from prior years.

You'll find these in a company's 10-K annual report. Here is the formula for calculating dividends: Annual net income minus net change in retained earnings = dividends paid.