I.INVESTMENT DECISIONS II FINANCING DECISIONS III.DIVIDEND DECISION/
RESIDUAL DECISIONS
Cash flow of project— COST: Amount of earnings:
Series of cash receipts and Cost of raising funds-- different for
payments over the life of an different sources. Opt for cheaper Current and past earnings--- major
investment source. determinant decision about
Net cash flows expected from the dividend
investment during the life of
investment
Net cash flows > funds invested
The rate of return— RISK: Stability of dividends:
Expected returns from each Different risk levels associated with Companies follow a policy of
proposal and risk assessment. different sources. stabilising dividend per share.
Ex. Two projects A and B, Debt-- high risk -- repayment of Increase in dividends --- when
Rate of return higher provided the interest with principal amount there is confidence that the earning
level of risk is same Shareholder’s funds-- risk low potential has gone up and not just
the earnings of the current year.
Dividend per share is not altered if
the change in earnings is small/
seen to be temporary in nature.
The investment criteria involved FLOATATION COSTS: Growth opportunities:
— Higher the floatation costs--- less Good growth opportunities----
Calculations--Amount of attractive is the source retain more money out of their
investment, interest rate, cash flow earnings --- finance the required
and rate of return compare each investment
opportunity by using capital Growth companies--- dividend
budgeting techniques—Rate of smaller in comparision to non
, return, cash flows, cost of capital growth companies--- more
retained earnings
Growth companies----
Expansion---10cr profits-- 4.5 cr
RE and 5.5 cr Div
Non growth companies---
Stability---- 80% Div 20%
Contingency
CASH FLOW POSITION OF THE Cash flow position
COMPANY Dividend payment-- outflow of cash
Stronger cash flow position-- Company may be earning profit---
debt financing is more viable short on cash
Availability of enough cash
necessary for dividend declaration
FIXED OPERATING COSTS Shareholders’ preference
High FOC ( rent, insurance Certain amount is paid as
premium, salaries) ---- low debt dividend--- companies declare the
financing is better same
Low FOC ---- more debt financing Some shareholders depend
may be preferred. upon regular income from the
investments.
CONTROL CONSIDERATIONS Taxation policy
Issue of more equity -- leads to Choice between--- payment of
dilution of management’s control dividend and retaining the
over business earnings--- affected by
Debt financing-- no such difference in tax treatment of
RESIDUAL DECISIONS
Cash flow of project— COST: Amount of earnings:
Series of cash receipts and Cost of raising funds-- different for
payments over the life of an different sources. Opt for cheaper Current and past earnings--- major
investment source. determinant decision about
Net cash flows expected from the dividend
investment during the life of
investment
Net cash flows > funds invested
The rate of return— RISK: Stability of dividends:
Expected returns from each Different risk levels associated with Companies follow a policy of
proposal and risk assessment. different sources. stabilising dividend per share.
Ex. Two projects A and B, Debt-- high risk -- repayment of Increase in dividends --- when
Rate of return higher provided the interest with principal amount there is confidence that the earning
level of risk is same Shareholder’s funds-- risk low potential has gone up and not just
the earnings of the current year.
Dividend per share is not altered if
the change in earnings is small/
seen to be temporary in nature.
The investment criteria involved FLOATATION COSTS: Growth opportunities:
— Higher the floatation costs--- less Good growth opportunities----
Calculations--Amount of attractive is the source retain more money out of their
investment, interest rate, cash flow earnings --- finance the required
and rate of return compare each investment
opportunity by using capital Growth companies--- dividend
budgeting techniques—Rate of smaller in comparision to non
, return, cash flows, cost of capital growth companies--- more
retained earnings
Growth companies----
Expansion---10cr profits-- 4.5 cr
RE and 5.5 cr Div
Non growth companies---
Stability---- 80% Div 20%
Contingency
CASH FLOW POSITION OF THE Cash flow position
COMPANY Dividend payment-- outflow of cash
Stronger cash flow position-- Company may be earning profit---
debt financing is more viable short on cash
Availability of enough cash
necessary for dividend declaration
FIXED OPERATING COSTS Shareholders’ preference
High FOC ( rent, insurance Certain amount is paid as
premium, salaries) ---- low debt dividend--- companies declare the
financing is better same
Low FOC ---- more debt financing Some shareholders depend
may be preferred. upon regular income from the
investments.
CONTROL CONSIDERATIONS Taxation policy
Issue of more equity -- leads to Choice between--- payment of
dilution of management’s control dividend and retaining the
over business earnings--- affected by
Debt financing-- no such difference in tax treatment of
