Page 190 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 8

Dividend policy in the real world

3.1 Balancing the theoretical and practical considerations

In the real world managers have to make a judgement on dividend
policy after taking many varying factors into account.

Summary of key considerations:

 The clientele effect – What dividends are the shareholders expecting?

 The cash needs of the company

 Signalling – What dividend did the company pay last year?

 Legal factors – Is it legal to pay out a dividend?

 Debt covenants e.g. is there a minimum gearing ratio imposed on the

company, or a maximum dividend payout percentage, as a covenant in a
debt agreement?

 Tax impli cations – What is the tax impact for shareholders of paying
dividends?

 Link to investment and financing – What investment opportunities does the

company face? How difficult/expensive is it to raise external finance?

 Inflation – what dividend increase is needed to maintain the purchasing
power of last year's dividends?

182