Tax Aspects

Tax Aspects With effect from financial year 2003-4, dividend income from domestic companies and mutual funds is exempt from tax in the hands of the shareholders investors unit holders. However, the domestic companies will be liable to pay dividend distribution tax at the rate of 12.5 per cent (plus surcharge) on dividends paid after April 1, 2003. Finance-Assignments.comInstructions Feel free to send us an i

Procedural Aspects

Procedural Aspects The important events and dates in the dividend payment procedure are: 1. Board Resolution: The dividend decision is the prerogative of the board of directors. Hence, the board of directors should in a formal meeting resolve to pay the dividend. 2. Shareholder Approval: The resolution of the board of directors to pay the dividend has to be approved by the shareholders in the annual general meetin


LEGAL PROCEDURAL AND TAX ASPECTS Legal Aspects The amount of dividend that can be legally distributed is governed by company law pronouncements in leading cases, and contractual restrictions. The important provide company law pertaining to dividends are described below. 1. Companies can pay only cash dividends (with the exception of bonus shares). A cash, dividend may also be remitted by cheque or by warrant. The


Rationale As pointed out earlier, no major economic benefit results from bonus shares and share splits. Yet certain advantages are associated with them. In the first place the issue of bonus shares, splits would have the effect of bringing the market price of shares within more popular range and result of larger number of shares outstanding. The larger number of outstanding shares will promote more active tradi


BONUS SHARES (STOCK DIVIDEND) AND STOCK (SHARE) SPLITS An integral part of dividend policy of a firm is the use of bonus shares and stock splits. Both involve issuing new shares on a prorate basis to the current shareholders while the firm’s assets, its earnings, the risk being assumed and the investors percentage ownership in the company remain unchanged. The only definite result from either a bonus shar


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Capital Market Considerations

Capital Market Considerations Yet another set of factors that can strongly affect dividend policy is the extent to which the has access to the capital markets. In case, the firm has easy access to the capital market because it is financially strong or large in size, it can follow a liberal dividend policy. How the firm has only limited access to capital markets, it is likely to adopt low dividend payout such firm

Dilution of Ownership

Dilution of Ownership The financial manager should recognize that a high D/P ratio mar in the dilution of both control and earnings for the existing equity holders. The control aspect already been discussed, Dilution in earnings results because low retention may necessitate issue of new equity shares in the future, causing an increase is the number of equity outstanding and ultimately lowering earnings per share


Opportunities The firm should not retain funds if the rate of return earned by it would be than one which could have been cameo by the investors themselves from external investors funds. Such a policy would obviously be detrimental to the interests of shareholders, It is to ascertain the alternative investment opportunities of each of its shareholders and, therefore alternative investment opportunity rate, Howev

Owners Considerations

Owners Considerations The dividend policy is also likely to be affected by the owner’s considerations of (a) the tax status of the shareholders, (b) their opportunities of investment, and (c) the dilution of ownership. It is well nigh impossible to establish a policy that will maximize each owner’s wealth. The firm must aim at a dividend policy which has a beneficial effect on the wealth of the major