Dividend and determinants of Dividend Policy Dividend Dividend refers to the corporate net profits distributed among shareholders.

Div idends can be both preference dividends and equity dividends. Preference dividen ds are fixed dividends paid as a percentage every year to the preference shareho lders if net earnings are positive. After the payment of preference dividends, t he remaining net profits are paid or retained or both depending upon the decisio n taken by the management. Determinants of Dividend Policy The main determinants of dividend policy of a firm can be classified into: Dividend payout ratio Stability of dividends Legal, contractual and internal constraints and restrictions Owner's considerations Capital market considerations and Inflation. Dividend payout ratio Dividend payout ratio refers to the percentage share of the net earnings distrib uted to the shareholders as dividends. Dividend policy involves the decision to pay out earnings or to retain them for reinvestment in the firm. The retained ea rnings constitute a source of finance. The optimum dividend policy should strike a balance between current dividends and future growth which maximizes the price of the firm's shares. The dividend payout ratio of a firm should be determined maximizing the wealth of the firm s owners with reference to two basic objectives and providing sufficient funds to finance growth. These objectives are interrela ted. Stability of dividends Dividend stability refers to the payment of a certain minimum amount of dividend regularly. The stability of dividends can take any of the following three forms : constant dividend per share constant dividend payout ratio or constant dividend per share plus extra dividend Legal, contractual and internal constraints and restrictions

Legal stipulations do not require a dividend declaration but they specify the co nditions under which dividends must be paid. Such conditions pertain to capital impairment, net profits and insolvency. Important contractual restrictions may b e accepted by the company regarding payment of dividends when the company obtain s external funds. These restrictions may cause the firm to restrict the payment of cash dividends until a certain level of earnings has been achieved or limit t he amount of dividends paid to a certain amount or percentage of earnings. Inter nal constraints are unique to a firm and include liquid assets, growth prospects

, financial requirements, availability of funds, earnings stability and control. Owner's considerations The dividend policy is also likely to be affected by the owner's considerations of the tax status of the shareholders, their opportunities of investment and the dilution of ownership. Capital market considerations The extent to which the firm has access to the capital markets, also affects the dividend policy. In case the firm has easy access to the capital market, it can follow a liberal dividend policy. If the firm has only limited access to capita l markets, it is likely to adopt a low dividend payout ratio. Such companies rel y on retained earnings as a major source of financing for future growth. Inflation With rising prices due to inflation, ot be sufficient to replace obsolete to rely upon retained earnings as a s, inflation affects dividend payout the funds generated from depreciation may n equipments and machinery. So, they may have source of fund to replace those assets. Thu ratio in the negative side.

2a, bonus share Free shares of stock given to current shareholders, based upon the number of sha res that a shareholder owns. While this stock action increases the number of sha res owned, it does not increase the total value. This is due to the fact that si nce the total number of shares increases, the ratio of number of shares held to number of shares outstanding remains constant.

2b, share split Stockholding & Investments numerical increase of shares without affecting total value an act of issuing stockholders with at least one more share for every share own ed, without affecting the total value of each holding. A share split usually occ urs because the stock price has become too high for easy trading.

3, rationality Mental state of a rational person characterized by (1) beliefs that are coherent (not contradictory) and compatible with the person's experience within a given context, (2) purposeful (intended to produce certain results) behavior guided by means versus ends analysis, (3) decision making based on cost-versus-benefit (p ain versus gain) evaluation, and (3) an overall optimization approach (utility m aximization) expressed in attempts to maximize advantages or gains and to minimi ze disadvantages or losses. See also Bounded Rationality.

4 DETERMINANTS OF WORKING CAPITAL There are lots of factor of determinants of working capital 1) Nature of business - working capital requirement of a firm basically influenc ed by the nature of its business trading and financial forms have a very small i nvestment in fixed assets, but require a large sum of money to be invested in wo rking capital. Retails stores, for example must carry large stock of a verity of good to satisfy varied and continuous demand of their customer. 2) Market and demand condition - the working company related to its sales . It i s difficult to precisely determine the relationship between the volume of sales and working capital need. Current assets will have to be employed before growth takes place. Then necessary to make planning of working capital for a growing fi rm on a continuous basis 3) Technology and manufacturing policy - the manufacturing cycle comprise of the purchase and use of raw material and the production of finished goods. Longer t he manufacture cycle, larger will be the firm's working capital requirement. For example, the manufacturing cycle in the case of a boiler, depending on its size , may range between six to twenty four month. On the other hand the manufacturin g cycle of product such as detergent powder, soap, ice creams etc. May be a few hour extend product take a large time

4) Credit policy of the firm affect the working capital by influencing the level of debtor. The credit term to be guaranteed to customer may depend upon the nor m of the industry to which the firm belong. But a firm has the flexibility of sh aping its credit policy within the constraint of industry norms and practice. Th e firm should use discretion in granting credit term to us customer 5) Operating efficiency - the operating efficiency of the firm relates to the op timum utilization of all its resource at minimum costs. The efficiency in contro lling operating cost and utilizing fixed and current assets leads to operating e fficiency. The use of working capital is improved and pace of cash conversion cy cle is accelerated with operating efficiency. Better utilization improves profit ability and helps the releasing on working capital 6) Conditions of supply: The inventory of raw material, spares and stores depend s on the conditions of supply. If the supply is prompt and adequate, the firm ca n manage with small inventory. However, if the supply is unpredictable and scant then the firm, to ensure continuity of production, a similar policy may have to be followed when the raw material is available only seasonally and production o perations are carried out round the year 5a,leasing lease: A written agreement under which a property owner allows a tenant to use t he property for a specified period of time and rent.

5b,hire purchase A system by which a buyer pays for a thing in regular installments while enjoyin g the use of it. During the repayment period, ownership (title) of the item does not pass to the buyer. Upon the full payment of the loan, the title passes to t he buyer. UK term; the usual US term is installment buying.

5c,venture capital VC. Funds made available for startup firms and small businesses with exceptional growth potential. Managerial and technical expertise are often also provided. a lso called risk capital.

5d,private equity Equity securities of companies that are not listed on a public exchange. Transfe r of private equity is strictly regulated; therefore, any investor looking to se ll his/her stake in a private company has to find a buyer in the absence of a ma rketplace. Returns on private equity generally occur in three ways: a merger or sale, an initial public offering, or a recapitalization.