Dividend decision answers the question: how much profit should be distributed to shareholders and how much should be retained for future growth. Dividend policy impacts shareholder satisfaction, cash flow planning, and the firm’s long-term financing needs.
This topic is usually asked as:
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Dividend decision is the decision about the portion of profit to distribute as dividend and the portion to retain in the business as retained earnings (concept).
Dividend decision is one of the three major finance decisions (investment, financing, dividend).
Simple relation: payout ratio + retention ratio = 1 (concept).
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Any three dividend policies (concept):
Any three with brief meaning are sufficient.
Payout vs retention (concept):
Relation: payout + retention = 1 (concept).
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Dividend decision answers the question: how much profit should be distributed to shareholders and how much should be retained for future growth. Dividend policy impacts shareholder satisfaction, cash flow planning, and the firm’s long-term financing needs.
This topic is usually asked as:
You should be able to:
Dividend decision is the decision about the portion of profit to distribute as dividend and the portion to retain in the business as retained earnings (concept).
Dividend decision is one of the three major finance decisions (investment, financing, dividend).
Simple relation: payout ratio + retention ratio = 1 (concept).
Reasons (write any 5):
Common policies (concept):
Dividend theories broadly fall into:
Walter suggests dividend policy affects value based on comparison of:
Simple interpretation:
Gordon’s “bird-in-hand” view suggests investors prefer certain dividends over uncertain future capital gains, so dividend policy can affect share value (concept).
Key exam keyword: certainty preference (dividend now vs gain later).
Miller and Modigliani argue dividend policy is irrelevant to firm value under ideal conditions such as:
Value depends on earnings and investment decisions, not on how earnings are split (dividend vs retention).
Write any 8–10 points:
Earnings available → Investment needs (capex/working capital) → Target capital structure (debt/equity) (concept) → Decide retention → Decide dividend payout → Ensure liquidity and compliance (concept) → Communicate policy to shareholders
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Dividend decision is payout vs retention of earnings.
A sound dividend policy balances shareholder return with liquidity and long-term growth needs (concept).