Managerial Considerations in Dividend Pay-Out

The factors that deserve considerations are:

1. Fund needs of the firm
2. Liquidity
3. Assessment of any valuation information
4. Control
5. restrictions in bond indenture or loan agreement and
6. Ability to borrow

In dividend pay out,first consideration to the mangement is the funds need of the firm.Cash budgets and projected source and use of funds statements are of particular use.The cash budgets should be prepared taking into account the expected operating cash flows of the firm,expected future capital expenditures and any other thing that affects the cash position or in other words the financial affairs of the firm.A famous quote from J.C.Van Horne where he says that "The key is to determine the likely cash flows and cash position of the company in the absence of a change in dividend."

The firm will determine if anything is left over after servicing its fund needs including profitable investment projects.The farsightedness on the part of the management is of great necessity taking into account the firms situation over a resonable number of years to iron out fluctuations.The management should therefore analyse the likely ability of the firm to sustain the dividend relative to the probability distributions of future cash inflows,outflows and cash positions.Since dividends reflect and represent a cash outflow,dividend decisions need major considerations.a

A growing company cannot be so liquid as it needs funds for fixed assets and permanent working capital requirements.However some liquidity cushions are always a sound financial policy and the maangement of the company must want it for the sake of flexibility of the company and for protection against risks and uncertainity.THe liquidity of the company involves investment and tak9ing financial decisions at the right time.THe rate of asset expansion and the need for funds are determined by correct investment decisions.So specific generalisations as to the effect of dividends on valuation cannot be easily made.Generally companies having the same growth rate follow the same dividend pay out ratio.The management should therefore judge the informational effect of a dividend-the expectations of the investors.

Dividend pay out has a direct effect on the controlling interest of the company.The management should therefore give a serious though on this aspect of financial management.In case a company raises its dividend pay-out,it may need to raise capital at a later time through the sale of shares and this may lead to dilution of the controlling interest.In such a circumstance,the existing stock holder may prefer a lesser amount of dividend and financing of investment needs with retained earnings.THerefore taking correct decisions on a dividend pay out will prove beneficial only if prudent and efficient financial decisions and managerial considerations on dividend payout is made.