CF Asignment Finals

MANAGEMENT INFORMATION SYSTEM
ISSUES IN IMPLEMENTATION OF MIS
ASIGNMENT # 2
SUBMITTED TO
MISS Zahra
SUBMITTED BY
SANA MEHAR
Roll No: 08
BBA (Hons.)
DEPARTMENT OF MANAGEMENT SCIENCES
LAHORE COLLEGE FOR WOMEN UNIVERSITY, LAHORE

Dividend:
Dividend is the distribution of profit or the portion of net income paid out to shareholders. It is
paid to shareholders in cash or stock for making investment and bearing risk. Dividend policy is
simply concerned with determining the portion of firm’s earning into dividend and retained
earnings in the firm.
A firm’s dividend policy is influenced by the large numbers of factors. Some factors affect the
amount of dividend and some factors affect types of dividend. The following are some of the
major factors which influence the dividend policy of the firm.
Factors affecting dividend policy:
1. Legal requirements:
For any company ,there is no legal compulsion to distribute dividend. However, there certain
condition imposed by law regarding the way dividend is distributed.
Basically there are three rules relating to dividend payments.
 Net profit rule:
According to this rule , if the company is in profit during the current year, it pays
dividend and if it is in loss then it does not.
 The capital impairment rule:
According to this rule, firm cannot pay dividend out of its paid in capital because it
affects the firm’s equity base as they are kept to protect claim of creditors by maintaining
sufficient equity base.
 Insolvency rule:
According to this rule , if firms total asset is less than its total liability then it cannot pay
dividend as the firm is considered to be financially insolvent.
2. Firms liquidity position:

Dividend pay-out is also affected by firm’s liquidity position. In spite of sufficient retained
earnings, the firm may not be able to pay cash dividend if the earnings are not held in cash. In
this case the firm or company declares stock dividend instead of cash dividend.
3. Repayment need:
A firm uses several forms of debt financing to meet its investment needs. These debt must be
repaid at the maturity. If the firm has to retain its profits for the purpose of repaying debt, the
dividend payment capacity of the firm reduces. Therefore, the firm firstly pays payment to all the
debt and if remains then provides dividend.
4. Expected rate of return:
If a firm has relatively higher expected rate of return on the new investment, the firm prefers to
retain the earnings for reinvestment rather than distributing cash dividend.
5. Stability of earning:
If a firm has relatively stable earnings, it is more likely to pay relatively larger dividend than a
firm with relatively fluctuating earnings.
6. Desire of control:
When the needs for additional financing arise, the management of the firm may not prefer to
issue additional common stock because of the fear of dilution in control on management.
Therefore, a firm prefers to retain more earnings to satisfy additional financing need which
reduces dividend payment capacity.
7. Access to the capital market:
If a firm has easy access to capital markets in raising additional financing, it does not require
more retained earnings. So a firm’s dividend payment capacity becomes high.
8. Shareholder’s individual tax situation:

For a closely held company, stockholders prefer relatively lower cash dividend because of higher
tax to be paid on dividend income. The stockholders in higher personal tax bracket prefer capital
gain rather than dividend gains. It is because the tax rate on cash dividend is higher than on
capital gain.
9. Leverage:
A company having more leverage in their financial structure and consequently, frequent interest
payments will have to decide for a low dividend payout. Whereas a company utilizing their
retained earnings will prefer high dividends.
10. Future financial requirements:

Dividend payout will also depend on the future requirements for the additional capital. A
company having profitable investment opportunities is justified in retaining the earnings.
However, a company with no internal or external capital requirements should opt for a higher
dividend.
11. Business cycles:

When the company experiences a boom, it is prudent to save up and make reserves for dips.
Such reserves will help a company declare high dividends even in depressing markets to retain
and attract more shareholders.
12. Growth:
Companies with a higher rate of growths, as reflected in their annual sales growth a ratio of
retained earnings to equity and return on net worth, prefer high dividend payouts to keep their
investors happy.
13. Changes in govt policies:

There could be the change in the dividend policy of a company due to the imposed changes by
the govt.
14.Profitability:
The profitability of a firm is reflected in net profit ratio, current ratio, and ratio of profit to total
assets. A highly profitable company generally pays higher dividends and a company with less or
no profits will adopt a conservative dividend policy.

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MANAGEMENT INFORMATION SYSTEM

ISSUES IN IMPLEMENTATION OF MIS

DEPARTMENT OF MANAGEMENT SCIENCES

LAHORE COLLEGE FOR WOMEN UNIVERSITY, LAHORE

2. Firms liquidity position:

8. Shareholder’s individual tax situation:

10. Future financial requirements:

11. Business cycles:

13. Changes in govt policies:

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