(i) Cash flow position (viii) Floatation costs Solution The dividend decision of a company deals with what portion of the profits is to be distributed as dividends between the shareholders and what portion is to be kept as retained earnings. (i)Cash flow position (ii) Cost of equity However, shareholders prefer higher dividends, as dividends are tax free in the hands of shareholders. Ans. (All India 2012) Stability in Earnings: A company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings. 10.What does higher business risk indicate? State any four factors affecting the dividend decision. 13.A company wants to establish a new unit in which a machinery of worth ? According to this approach, owners interest can be best served by wealth maximisation. or (ii) The interest should be deducted from profit before tax. (adsbygoogle = window.adsbygoogle || []).push({}); Shareholders Preference: While declaring dividends, management must keep in mind the preferences of the shareholders. or The supervisor is finding it difficult to cope up with the situation. Discuss the relevance of Taylor and Fayols contribution in the contemporary business environment. (i) The rate of interest on loan/debentures should be less than the rate of Return on Investment. Legal constraints: Certain provisions of the Companys Act place restrictions on payouts as a dividend. preference share capital in the capital structure so as to increase the return on equity shares. Some shareholders in general desire that at least a certain amount is paid as dividend. The decision taken is as to how much dividend is to be retained in business and how much should be distributed to shareholders, after taking into account various factors affecting it. Indian Railways has launched a new broad gauge solar power train which is going to be a path breaking leap towards making trains greener and more environment friendly. if project A is bringing 10% return and project B is bringing 15% return then, a businessman would prefer project B. A prudent financial manager would normally tax for a source which is the cheapest. Explain any five such factors. increase in dividend is only done when the earning potential of the company has gone up and not just the current years earnings. Various factors affecting dividend decision Taxation Policy: If the tax on dividends is higher, it is better to pay less by way of dividends. Who can file a complaint in a consumer court? (v) Cost of debt (xii) Regulatory framework Growth opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. Dividends are paid out of current and past earnings. Certain provisions of the Companies Act, place restrictions on payouts as dividend. (ii) To Ensure Proper Balance of Finance: It is always ensured that the balance of cash should neither be in excess nor in short. What do you understand by Vestibule training? For example, if the balance of cash needed is rupees five lakh but the actual cash balance is ten lakhs, the cash of five lakhs will remain idle and it will incur loss of interest. The rate of dividend on preference shares is fixed which is generally lower than that of equity shares. When a company increases debt, the financial risk faced by the equity shareholders increases and then EPS starts decreasing with inclusion of debt beyond a certain point. A company having stable earnings is in a position to declare higher dividends. Dividend involves an outflow of cash. (i) Return The capital structure should give maximum return to the shareholder. A prudent financial manager would normally tax for a source which is the cheapest. Debt is considered the cheapest of all sources, tax deductibility makes it still cheaper. Some people believe that there are certain limitations of planning that you must know. The main goal of financial management is to- (a) Maximize shareholder wealth (b) Wealth maximization concept (c) Market value of equity shares maximization (d) All of the above Answer 5. (iv)Taxation policy Ans. 5.Which type of companies can declare higher dividend? Explain any four factors which affect the dividend decision of a company. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. While granting loans to a company, sometimes, the lender may impose certain restrictions on the payment of dividends in future. How much of the profits earned by a company will be distributed as profit and how much will be retained in the business is affected by many factors. (iv) Return on Investment (Rol) (xi) Control Ans. What is the meaning and definition of selection. are two conditions to use trading on equity: Cash flow position: Dividends involve an outflow of cash. The finance manager analysis the following factors before dividing the net earning between dividend and retained earnings: 1. 23.Explain the following as factors affecting financing decision Debt is considered the cheapest of all sources, tax deductibility makes it still cheaper. (iv) Floatation cost (Delhi 2012) Explain with examples, the difference between general and specific environment. Such provisions must be adhered while declaring the dividend. Shareholder Preference: If the shareholders in a general desire that at least a certain amount should be paid as a dividend, the companies are likely to declare the same. The following calculation will show how trading on equity increases the return on equity shares It has something to do with financial leverage or capital structure. For example,Trading on equity refers to the use of fixed cost sources of finance such as debentures and (iii)Dividend decision This decision involves how much of the after tax profits is to be distributed as dividends to shareholders and how much to retain in the business to meet future investment requirements. (iii) Stability of Dividend: Every company adopts the policy of maintaining the stability of dividend per share. explain the factors affecting dividend decision. NCERT Solutions for Class 6, 7, 8, 9, 10, 11 and 12. Thus, cost of equity may go up sharply and share price may decrease. Thus, interest is the cost of debentures or loan and dividend paid by the company is the cost of equity and preference share capital. (a)Financial risk It refers to a position when a company is unable to meet its fixed financial charges namely, interest payment, preference dividend and payment obligations. The cost of debentures is generally lower and tax deductible. 7.Cost of debt is lower than the cost of equity share capital. are two conditions to use trading on equity: These companies tend to pay higher dividends than the smaller companies. Because interest is a tax-deductible expense, a higher tax rate lowers the cost of debt and makes it more appealing than equity. (ii) The interest should be deducted from profit before tax. A long-term or short-term investment decision can be made. Therefore, from this point of view the equity share capital should be avoided. then a company cannot work only with the debt? (i) Stability of dividend (ii) Shareholders'preference (iii) Legal constraints (iv) Access to capital market Answer given from previous years will be shown to this effect. preference share capital in the capital structure so as to increase the return on equity shares. (ii) Dividend decision It relates to decision regarding distribution of dividend. 9. There are various factors that affect the dividend decision. or When a firm is able to borrow at a lower rate, ft increases the capacity to employ higher debt and can increase the debt component in the capital structure. Financial decision deals with quantum of finance to be raised from long-term sources, viz debt equity. A prudent financial manager would normally tax for a source which is the cheapest. In case, they fail to pay debt security holders can claim over the assets of the company and if firm fails to meet return of principal amount, it can even go to liquidation u.id at the stage of insolvency. Economic conditions, tax policy, government regulation, capital structure, and financial markets are all examples of external factors. If the company cannot cover these financial charges, it can be forced into liquidation. Thus, dividend per share is not altered when the change is small or temporary in nature. Total risk consists of two types of risks: They may be internal or exterior (the examples above could both be considered a form of internal constraints, such as lack of knowledge or poor cash flow). (ii) Tax rate affect the choice of capital structure? Thus, it is an important determinant of the extent of trading on equity. Explain factors affecting the dividend decision. This is because however dividends are tax fall in the hands of shareholders, dividends distribution tax is levied on the company. Ans. What is meant by 'dividend decision'? Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. 4.Name the major determinant of dividend decision. A good dividend policy will enhance the market value of shares thus, meeting the objective of wealth maximisation. 12.What does a firms lower business risk indicate? Earnings: Dividends are paid out of current and past year earnings. (b)Business risk It depends upon fixed operating costs. Ans : A financial limitation is any circumstance that limits the number or quality of investment possibilities available to an investor. The following are the factors that affect the dividend decision. (All India 2011) Following are the factors determining the relative proportion of various types of funds, or the capital structure: Investment decision can be long-term, also known as capital budgeting where the funds are commited into long-term basis. It refers to the earning expected from the investment. Factors affecting dividend decision are: Explain the procedure for selection of employees. What makes principles of management flexible? Explain any two factors which affect this decision. This is not a good situation. With a debt component in the total capital, shareholders are likely to have the benefit of a higher rate of return on the share capital. The objective of financial management is to maximise the wealth of the owners of the business to the maximum extent. Use of debt increases the financial risk of a business. underwriting commission, brokerage, stamp duty, listing charges, etc. Various factors influencing capital structure are: 10 Contractual Constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future The companies are required to ensure that the dividends do not violate the terms and conditions of the loan agreement in this regard. (ii) Stability of Earnings: A company having stable earnings is in a position to declare more dividends and vice-versa. The factors that affects the dividend decisions are: Amount of Earnings: Dividends are paid out of current and past earnings. Dividend Decision Business Studies definition Dividends and Factors Affecting Dividend Decisions Dividend is the portion of profits distributed to shareholders. For example, Let us consider two public companies X Ltd and Y Ltd. This is referred to as the debt-to-equity ratio. This decision involves how much of the 'after tax profits' is to be distributed as dividends to shareholders and how much to retain in the business to meet future investment requirements. Financial risk refers to a position when a company is not able to meet its fixed financial charges namely interest, preference dividend payment and repayment obligations. Debt finance, on the other hand, has no such implications. 2. Total risk consists of two types of risks: (a)Financial risk It refers to a position when a company is unable to meet its fixed financial charges namely, interest payment, preference dividend and payment obligations. (Compartment 2014) Explain any six factors affecting the dividend decision of a company. 3.What is meant by financial risk? State any four factors affecting the dividend decision. These debts get greater and more difficult to repay as interest accrues. It is vital to plan ahead of time for major expenses. i) Amount of Earning: A firm pays dividends out of its current and the past earnings. When a company increases debt, the financial risk faced by the equity shareholders increases and then EPS starts decreasing with inclusion of debt, beyond a certain point. It refers to the risk of the company not being able to cover its fixed financial costs. Identify the type of decision involved here in financial management. Some shareholders in general desire that at least a certain amount is paid as dividend. It covers decisions concerning cash, inventory, and receivables levels. Short-term investment decision also known as working capital decision and it is concerned with the levels of cash, inventories and debtors. (All India 2009; Delhi 2009) State the two important objectives of Financial Planning. Explain any two advantages and two limitations of it. Ans. Working capital financing refers to the amount of funds that are used to cover all of a business's short-term expenditure that is payable within a year. Trading on equity refers to the use of fixed cost sources of finance such as debentures and Earning Per Share (EPS). Explain the factors affecting the dividend decision. When a guy spends more than he earns, he is putting himself into financial problems. Thedividend in growth companies, is, therefore, smaller than that in non-growth companies. (iv) Risk of consideration While deciding the capital structure, risk must be analysed and considered. If youre not careful, you could end up in even more debt, which can quickly spiral out of control. Ans. The balance of cash in both these situations is harmful. (iii) Legal constraints (iv) Access to capital market 7. Investment decision can be long-term and short-term. Wealth of the shareholders can be computed by the following formula: Shareholders Current Wealth in a Company = Number of Shares x Market Price Per Share. (iii)Legal constraints Certain provisions of The Companies Act place restrictions on payouts as dividend. Therefore, from this point of view the equity share capita! (Delhi 2008 C) makes debt relatively cheaper and increases its attraction in relation to equity. (iii)Cash flow position (i) Cost The cost of raising funds through different sources are different. State the features of Demonetization. Higher fixed operating cost means higher business risk and vice-versa. Explain any two factors which affect this decision. (c)Stability of dividends (i) Access to capital market To cover their high expenses, many people turn to credit cards and loans. This is not a good situation. debentures, earn a relatively high rate of return on equity capital. Whereas, at the time of high business risk, it should depend upon equity. 8.What is meant by floatation cost? are two conditions to use trading on equity: (All India 2010; Delhi 2010) 20.How does trading on equity affect the choice of capital structure of a company? The part of the profit that is distributed to shareholders is referred to as a dividend. Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. Every business must make three major financial decisions, which are as follows: The investment decision is a financial decision that deals with how a companys cash is invested in various assets. Access to Capital Market: Large and reputed companies generally have easy access to the capital market and therefore, depend less on retained earnings to finance their growth. (v)Flexibility To maintain flexibility, a firm should not use its debt potential in full, So that it can borrow in unforeseen circumstances. The main factors affecting dividend decisions are discussed below: (i) Amount of Earnings: Dividends are paid out of current and past earnings. The company must try to calculate the risk involved in every proposal and .should prefer the investment proposal with moderate degree of risk only. (iv) Floatation cost From the point of view of floating costs, higher the floatation cost, less attractive the source becomes. For example, Let us consider two public companies X Ltd and Y Ltd. (iv) Floatation cost From the point of view of floating costs, higher the floatation cost, less attractive the source becomes. Under it, the long-term and short-term financial needs are anticipated and then the sources of availability of finance are located. Due to sudden rise in demand a firm wants to meet excess orders. Market price of the shares is the index of the capital invested. Both for-profit and non-profit enterprises require planning. (Here the stability of dividend means that the dividend will, in no case, be allowed to fall. To maintain some borrowing power to take care of unforseen circumstances. When a company increases debt, the financial risk faced by the equity shareholders increases and then EPS starts decreasing with inclusion of debt, then beyond this point, cost of equity may go up sharply and share price may decrease. More equity issues may result in a dilution of managements influence over the company. Explain any five such factors. Generally, companies try to stabilize dividends per share. Availability of enough cash is necessary for payment of declaration of dividends. (hots; Delhi 2010) Such provisions must be adhered while declaring the dividend. (b)Business risk It depends upon fixed operating costs. 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Must be done keeping in mind the firms overall objective of maximizing the shareholders wealth. The amount of cash flow of an investment proposal will be assessed properly before investing in the proposal. Meaning of Dividend decisions, types of Dividend decisions, Factors Affecting Dividend decisions, Dividend Decisions Class 12 Business Studies Financial Mana. Factors Impacting Financial Decision The following are some of the most critical factors that impact the financial decisions of the company: (a) Cost: The allocation of finances and cost-cutting are at the heart of all financing decisions. 232, Block C-3, Janakpuri, New Delhi, (hots; Delhi 2009 c). These companies tend to pay higher dividends than the smaller companies. Answer The factors that affects the dividend decisions are: Amount of Earnings: Dividends are paid out of current and past earnings. Ans. Various factors affecting dividend decision (ii) Financing decision It deals with quantum of finance to be raised from long-term sources, viz debt equity. What is meant by dividend decision? Ans. (iv) Risk Consideration While deciding the capital structure, risk must be analysed and considered. Dividend decision relates to how much of the companys net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements. 2. The better the cash flow position of the company, the better will be the capacity of the company to pay dividend. Ans. Thus, the floatation costs may also affect choice of capital structure. Under which consumer right does a business firm set up consumer grievance cell? Availability of enough cash in the company is necessary for declaration of dividends by it. The state of the market has a significant impact on financing decisions. Identify the financial decision which determines the amount of profit earned to be distributed and to be retained in the business. Factors affecting dividend decisions are: Dividend decision= whether to distribute earnings to shareholder as dividends or retain earnings to finance long-term profits of the firm. It arises when a company borrows. Thus, it can be concluded that Y Ltd using fixed cost sources, i.e. Ans. Factors affecting Dividend Decision 1. The dividend declared in growth companies is, therefore, smaller than that in the non-growth companies. Determining the overall cost of capital and the financial risk of the enterprise depends upon various factors. The risk associated with borrowed funds is higher than that associated with equity funds. If the tax on dividends is higher, it is better to pay less by way of dividends. (iii) Control considerations 3.Meaning of Capital Structure Capital structure refers to the mix between owners fund (equity) and borrowed funds (debt). Factors affecting dividend decision : Powered by Discourse, best viewed with JavaScript enabled, Explain the following as factors affecting 'dividend decision'. The higher a sources flotation cost, the less appealing it appears to management. Ans. (ii)Shareholders preference While declaring dividends, management must keep in mind the preferences of the shareholders in this regard. Unacademy is Indias largest online learning platform. (All India 2014) Get subscription and access unlimited live and recorded courses from Indias best educators. Therefore, earning is the most important determinant of dividend decision. Total risk consists of two types of risks: 21.Give the meaning of investment and dividend decisions of financial management. (All India 2009; Delhi 2009) Long-term investment decision is called capital budgeting decision and short-term investment decision is called working capital decision. Similarly, a decrease in dividends may have a negative impact on the share prices in the stock market. Explain the following as factors affecting dividend decision Thus, it is an important determinant of the extent of trading on equity. 27.Name the decision which financial manager will take, keeping in view the overallobjective of maximising shareholders wealth. 1. Learn more topics related to Business Studies, Access free live classes and tests on the app, One of the most common reasons for financial issues is poor. shareholders and how much of it is to be retained in the business. As a result, debt financing with a lower interest rate is preferable. In other words, it refers to the determination as how the total funds required by the business will be obtained from various long-term sources. (iii) Risk involved With every investment proposal, some degree of risk is also involved. Dividend decision A financial manager takes decision in three broad areas, viz, investment, financing and dividend, for maximising shareholders wealth. Stock Market reaction: For investors, an increase in dividend is good news and stock prices react positively to it. (a)Capital budgeting decisions or long-term investment decisions Factors affecting capital budgeting decisions are: (b)Working capital decisions or short-term investment decisions They are concerned with level of inventories, cash and debtors. How would you characterize the business environment? This decision involves how much of the after tax profits is to be distributed as dividends to shareholders and how much to retain in the business to meet future investment requirements. Explain any five factors. Long-term investment decision is called capital budgeting decision and short-term investment decision is called working capital decision. Name the objectives of management achieved by Indian Railways in the above case. The finance manager weighs the risk against the cost and favours securities with a low-risk factor. Companies with consistent cash flow can readily afford borrowed fund securities, but when cash flow is scarce, they must rely solely on owners fund securities. If Rol of a company is high, it can opt for trading on equity to increase the earning per share. (v) Flexibility To maintain flexibility, a firm should not use its debt potential in full, So that it can borrow in unforeseen circumstances. Ans. (iii) Flexibility If a firm uses its debt potential to the full, it loses flexibility to issue further debt. Thus, more debt can be used if debt can be raised at lower rate. Saving for your next large buy and then maxing out your credit cards is far more satisfying. Define scientific management. But if the tax rates are lower, higher dividends may be declared. 18.Explain how the Sovereign Gold Bond Scheme Everything you need to know! Get all the important information related to the CBSE Class 12 Examination including the process of application, important calendar dates, eligibility criteria, exam centers etc. 33.What is meant by financial structure cr capital structure of an organisation? Cash flow must not only cover fixed cash payment obligations but there must be sufficient cash for smooth working of the business. Stability in Earnings: A company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings. You are the finance manager of a company. State any two financial decisions taken by a financial manager. If the majority of the shareholders are of the former type, the company must declare dividend according to their expectation. Some of the important factors are discussed below. As a result, companies that are fearful of a takeover proposal may prefer debt to stock. or 14.Name the concept which increases the return on equity shares with a change in thecapital structure of a company. Dividends are paid out of current and past earning. A positive or negative cash flow position encourages or discourages investors to invest in the company. 4.Optimal Capital Structure A capital structure is said to be optimal when the proportion of debt and equity is such that it results in the increase of shareholders wealth. Higher fixed operating cost means higher business risk and vice-versa. A financial decision includes the amount of money to be raised from various long-term funding sources such as equity shares, preference shares, debentures, bank loans, and so on. (i) Cost The cost of raising funds through different sources are different. It is broadly concerned with three aspects, viz investment, financing and dividend. Ans. (Delhi 2011 c) 4. These companies tend to pay higher dividends than the smaller companies. 5.Factors Affecting Capital Structure (i)Risk consideration and A firms lower business risk indicates that a firm has lowered operating cost and can raise more capital by issue of debt securities. If a firms operating risk is lower, its capacity to use debt is higher and vice-versa. (All India 2011) The source becomes less appealing as the flotation cost rises. The company must try to calculate the risk involved in every proposal and .should prefer the investment proposal with moderate degree of risk only. Higher fixed operating cost means higher business risk and vice-versa. 26.Name the decision taken by a financial manager which determines the overall costof capital and the financial risk of the enterprise. or or Dividend Decision After making a profit, an organisation has to decide how much reward to give to its shareholders. State any three of its principles. Explain any four factors affecting this decision. Amount of Earning: A firm pays dividends out of its current and past earnings. 24.Determining the relative proportion of various types of funds depends upon Ans. Therefore, earnings is a major determinant of the decision about dividend. Ans. (c)Floatation costs (i)Flexibility (i)cost of debt and Do the qualities alone ensure leadership success? (i) The rate of interest on loan/debentures should be less than the rate of Return on Investment. A higher tax rate Stability of dividends, Explain the following as factors affecting dividend decision. Explain any two factors that affect the capital structure of a company. The following are the factors that affect the dividend decision. 2.Classification of Financial Decision (iv) Access to capital market Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earning to finance their growth. In other words, it is a decision on the companys capital structure.. Factors affecting dividend decisions are: (HOTS; Delhi 2008) Ans. Disadvantages of capital structure are: (Any two) If the market price of the shares increases, it can be said that capital (wealth) invested by the shareholders has been appreciating. (i) Stability of dividend (ii) Shareholderspreference (ii) Stability of earnings It also affects the dividend decision. (i) Stability of dividend Companies generally have a policy of stabilising dividends, i.e. (ii)cost of equity, affect the choice of capital structure. Earnings are an important factor as dividends are paid out of earnings. Thus, earnings are a major determinant of dividend decision. making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch. 138 Views Answer Internal and external factors are the two types. (v) Cash Flow Position: The payment of dividend results in outflow of cash. State any four factors affecting the dividend decision. (i)Investment decision The investment decision relates to how the firms funds are invested in different assets. This is because as per the current taxation policy, a dividend distribution tax is levied on companies. Explain the qualities of a good leader? The costs of obtaining finances from various sources fluctuate. 22.What is meant by long-term investment? (ii)Shareholders preference (ii)Financing decision It deals with quantum of finance to be raised from long-term sources, viz debt equity. if project A is bringing 10% return and project B is bringing 15% return then, a businessman would prefer project B. A change is only made, if the companys earning potential has gone up and not just the earnings of the current year. Explain the factors affecting the dividend decision. Factors affecting dividend decisions. (ii) Risk The use of debt adds to the risk of the company and shareholder. The higher levels of risks are attached to higher degrees of financial leverage. (iii) Risk consideration (iv) Control (Foreign 2014) (e)Cash flow position (k) Contractual constraints 16.Explain the factors that affect capital budgeting decision. (Foreign 2014, Delhi 2009) (i)Stability of dividend The chief factors affecting dividend decision are the following: (i) Earning: The dividend is paid out of the present and reserved profits. share holders and how much of it should be retained in the business for future requirements. (All India 2008) (ii)Growth opportunities 1.Define capital structure. Investment decision can be long-term, also known as capital budgeting where the funds are commited into long-term basis. (ii) Control consideration The ulitmate control of the company is that of the equity shareholders. Therefore, earnings is a major factor which affects dividend decision. (i)Return on Investment (Rol) (ii) Flexibility In the same way, if the fixed operational costs are lower, greater debt financing may be selected. Higher business risk indicates high fixed operating cost. Working capital decisions are short-term investment decisions that affect a companys day-to-day operations. This is because as per the current taxation policy, a dividend distribution tax is levied on companies. 2.How does cost of debt affect the capital strucutre of a company? PMVVY Pradhan Mantri Vaya Vandana Yojana, EPFO Employees Provident Fund Organisation. (Delhi 2009) Earning Per Share (EPS). As a result, the existing 500 and 1,000 currency notes ceased to be legal tender from that date. Determination of capital structure of a company is influenced by a number of factors. (b)Business risk It depends upon fixed operating costs. Download the PDF Question Papers Free for off line practice and view the Solutions online. Ans. Explain the following as factors affecting dividend decision: 1. (d)Growth opportunities (j) Legal constraints (i) Cost The costs of raising funds through different sources are different. (Delhi-2010) 1. As against this, a company having unstable earnings is likely to pay a smaller dividend. (ii) Cash flow position of business A stronger cash flow position may make debt financing more viable than funding through equity. A company having stable earnings can declare higher dividend whereas a company having unstable earnings is likely to pay smaller dividend. Ans : One of the most common reasons for financial issues is Ans : Overspending is readily caused by poor financial management. or 8. Solution The factors affecting the dividend decision are: Repayment need Legal requirements Stability of earning Expected rate of return Firm's liquidity position Explore more such questions and answers at BYJU'S. Suggest Corrections 0 Related Videos Methods of Depreciation ACCOUNTANCY In other words, it refers to the determination as how the total funds required by the business will be obtained from various long-term sources. 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Therefore, it should be used cautiously with equity. (i) Cash flow of the project Whenever a company is investing huge funds in an investment proposal, it expects some regular amount of cash to meet day-to-day requirements. 1. It is always good if the dividend remains stable or increases.) Cost of debt is affected by the tax rate. Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. What is Financial Risk? This implies that earnings play a key role in the dividend decision. The factors affecting the dividend decision are: Explore more such questions and answers at BYJUS. Thus, earnings are major determinant of dividend decision. A financial limitation is any circumstance that limits the number or quality of investment possibilities available to an investor. (Delhi 2009 c) What impact have these changes made on business and industry? The amount of cash flow of an investment proposal will be assessed properly before investing in the proposal. The choice of dividends should be made with the broader goal of increasing shareholder wealth in mind. There are always some shareholders who depend upon a regular income from their investments. 28.Explain the following as factors affecting dividend decision (All India 2014; Delhi 2014) The two main factors which affect financing decisions are: Equity shareholders expect a return on their investment, i.e. 6. (ii) Cost of equity Equity shareholders expect a return on their investment, i.e. Delhi - 110058. Floatation costs are those expenses which are incurred while issuing securities like equity shares, preference shares, debentures, etc, e.g. (Delhi-2010) Ans. Ans : Fiscal constraints, physical constraints (for example, network capacity), time constraints (for example, completion before significant events such as the next annual meeting), or any other limitation you anticipate as a factor affecting the achievement of the business goal are all examples of business constraints. Wealth maximisation means to increase the capital invested in the business by the shareholders. Earnings: Companies having high and stable earning could declare . (vii) Control If the firm wants more control, it will choose to raise funds through debt. debentures, earn a relatively high rate of return on equity capital. A company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings. Also, increased transparency in monetary transactions and disclosure led to a rise in government revenue in the form of tax collection. 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