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 and their price in the market. By the high percentage of its earnings, the firm can minimise the possibility of dilution of earnings.
Thus, in framing the dividend policy of a firm, consideration must he given to the require of equity holders.
Although the ultimate dividend policy depends on numerous factors, the avoidance of shareholders discontent is important. If the shareholders become dissatisfied with the existing dividers, policy, they may sell their shares, that control of the firm will be seized by some outside group. The takeover of a firm by outsiders is more likely when owners as satisfied with us dividend policy. It is the financial manager’s responsibility to keep in touch with the owner’s general attitude toward dividends.?