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Identify the financial decision which determines the amount of profit earned to be distributed and to be retained in the business. Explain any four factors affecting this decision.

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Dividend Decision 

i. Dividend is that portion of profit which is distributed to shareholders. 

ii. The decision involved here is how much of the profit earned by company is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirement. 

Factors affecting dividend decision are: 

i. Amount of Earnings: Dividends are paid from current and past earnings due to which earning is the major determinant of decision about dividend. 

ii. Stability of Earnings: 

a. The company who has stable earnings is in a better position to declare higher dividend. 

b. As against this, a company having unstable earnings pay smaller dividend. 

iii.Stability of Dividends: 

a. The increase in dividends is made when the earning potential has gone up. 

b. As against this, the dividend per share is not changed if change in earnings is small or temporary in nature. 

iv. Growth Opportunities: 

a. Companies having good growth opportunities retain more from their earnings in order to finance the investment. 

b. Thus the dividend in growth companies is smaller than that in the nongrowth companies. 

v. Cash Flow Position: 

a. Dividends involve an outflow of cash. 

b. A company may be profitable but short on cash. 

c. Availability of enough cash in the company is necessary for declaration of dividend by it. 

vi. Shareholder Preferences: Shareholder preferences must also be considered for determining the rate of dividend. There are two types of shareholders: 

a. Those who invest with the purpose of getting some regular income (i.e, retired, old or poor shareholder). The company must declare more dividend as such shareholders expect regular and stable amount of dividend. 

b. Those who invest in the company for capital gain (young and rich shareholders). The company must declare low dividend and reinvest that amount in the business for more profits in the future, which will thereby increase the stock price.

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