Explain any three factors affecting Dividend Decision and three factors affecting Financing Decision.

Answer – Dividend decision

The dividend decision determines the portion of profit distributed to shareholders and the portion retained for future needs.

• Amount of earnings: higher sustainable earnings permit higher dividends.
• Stability of earnings: stable income supports a regular dividend.
• Stability of dividend: companies often avoid frequent changes that create uncertainty.
• Growth opportunities: attractive projects increase the need to retain earnings.
• Cash-flow position: accounting profit alone is insufficient; payment needs cash.
• Shareholder preferences: some shareholders value current income, others future growth.
• Taxation policy: applicable tax treatment affects the attractiveness of distribution and retention.
• Stock-market reaction: dividend changes may influence investor expectations.
• Access to capital markets: easier external finance may permit a higher payout.
• Legal constraints: distribution must comply with applicable company law.
• Contractual constraints: loan agreements may restrict dividend payments.

For example, a profitable growing company may retain more earnings to finance expansion rather than distribute all its profit.

Example: from ₹5 lakh available profit, a company may distribute ₹2 lakh as dividend and retain ₹3 lakh for future investment.

Financing decision

A financing decision determines how much finance is obtained from owners' funds and borrowed funds. Owners' funds include equity and retained earnings; borrowed funds include loans and debentures.

Factors

• Cost: compare the cost of each source; interest is normally tax-deductible, subject to applicable rules.
• Risk: debt requires interest and repayment even when profits are low; excessive debt increases financial risk.
• Flotation costs: issue and arrangement expenses affect the net funds available.
• Cash-flow position: stable cash flows support regular debt payments.
• Fixed operating costs: high operating commitments leave less capacity for additional fixed financial charges.
• Control: issuing equity may dilute existing owners' control; debt generally does not confer ordinary voting rights.
• Capital-market conditions: investor confidence and market conditions influence the feasibility and cost of raising funds.

Example: a company with unstable receipts may prefer more equity even if debt appears cheaper.

Example: an enterprise needing ₹10 lakh may choose ₹6 lakh of equity and a ₹4 lakh bank loan after comparing cost, risk and control.