Dividend Decision

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The profits which are not distributed are impliedly retained in the firm. All firms whether small or big, have to decide how much of the profits should be reinvested back in the business and how much should be taken out in the form of dividends. On one hand, paying out more to the owners may help satisfying their expectations, on the other, doing so has other implications as a business that reinvests less will tend to grow slower. There cannot be any readymade policy for any firm regarding how much profit is to be distributed and how much portion is to be retained. Retention of profit is of course related to :

1. Reinvestment opportunities available to the firm.

2. The opportunity rate of return of the shareholders.

The distribution of profits by any firm is required to satisy the expectation of the shareholders. The profits can be distributed to shareholders either as current revenue or as capital receipt. These have their own tax implications in the hands of the shareholders as well as the firm. Both have their effect on the market value of the firm also. The finance manager is required to take various decisions regarding distribution of profit as dividen or as bonus shares. In his attempt, he has to look into the funds requirements of the firm and the shareholders interest. 

Thus , the finance manager is concerned with:

1. overall financial analysis and planning.

2.managing the asset structure of the firm, and 

3.managing the financial structure of the firm.