Dividend Policy Decision Homework Help

Dividend Policy Decision

The third major decision area of financial management is the decision relating to the dividend policy. The dividend decision should he analysed in relation to the financing decision of a firm. Two alternatives are available in dealing with the profits of a firm: (i) they can be distributed to the shareholders in the form of dividends or (ii) they can be retained in the business itself, The decision as to which course should be followed depends largely on a significant element in the dividend decision, the dividend-payout ratio, that is, what proportion of net profits should be paid out to the shareholders. The final decision will depend upon the
preference of the shareholders and investment opportunities available within the firm. The second major aspect of the dividend decision is the factors determining dividend policy of a firm in practice.

To conclude, the traditional approach to the functions of financial management had a very narrow perception and was devoid of an integrated conceptual and analytically framework. It had rightly been discarded in the academic literature. The modem approach to the scope of financial management has broadened its scope which involves the solution of three major decisions, namely, investment, financing and dividend. These are interrelated and should be jointly taken so that financial decision making is optimal. The conceptual framework for optimum financial decisions is the objective of financial management. In other words, to ensure an optimum decision in respect of these three areas, they should be related to the objectives of financial management. The goals/objectives of financial management are discussed in Section 3.

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