Dividend policy:

refers to the policy chalked out by companies regarding the amount it would pay to their shareholders as dividend. With profit making comes the question of utilizing the profit gainfully.

The companies have two options with them:

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They can retain these profits within the company

They can pay these profits in the form of dividends to their shareholders

The dividend policy to be adopted by the company is based on these two options. Once this is sorted out, a permanent dividend policy can be put into place. These policies shape the attitude of the investors and the financial market in general towards the concerned company. The policies are decided according to the current and future financial positions of the company. The preference and orientation of the investors are also taken into account. The following are the types of dividend policies: Constant Payout Ratio Constant Dollar Dividend Policy Regular with Extras

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The dividend policy acts as a signal for investors for gauging the future earning possibilities as expected by the management of the company. The dividend policies are directed towards attracting investors to their company. This is termed as the clientele effect. The firms that hold back free cash flows are lesser in value than those firms, which allow free cash flows and pay dividends from them. There are quite a few impediments to companies paying dividends to their shareholders. Some of these constraints are as follows:

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Consideration of taxes Consideration of returns Contractual constraints Cash flow constraints Legal constraints The dividend policy of a company has a relation with its common stock value. The Dividend Irrelevance Theory propounds that the dividend policy of a firm has no direct bearing on the cost of its capital or its value. The Dividend Relevance Theory, on the other hand, expostulates that the value of the firm is affected by its dividend policy. The Optimal Dividend Policy helps in increasing the value of the firm to the maximum. A Dividend Reinvestment Plan (DRIP) provides the investor the opportunity to reinvest dividends obtained from the company back into the company. The firm can repurchase the existent shares or it may issue new shares. OR

Dividend:
Dividend refers to the corporate net profits distributed among shareholders. Dividends can be both preference dividends and equity dividends. Preference dividends are fixed dividends paid as a percentage every year to the preference shareholders if net earnings are positive. After the payment of preference dividends, the remaining net profits are paid or retained or both depending upon the decision taken by the management. Determinants and pricedures of Dividend Policy The main determinants of dividend policy of a firm can be classified into: 1. 2. 3. 4. 5. 6. Dividend payout ratio Stability of dividends Legal, contractual and internal constraints and restrictions Owner's considerations Capital market considerations and Inflation.

1.

Dividend payout ratio Dividend payout ratio refers to the percentage share of the net earnings distributed to the shareholders as dividends. Dividend policy involves the decision to pay out earnings or to retain them for reinvestment in the firm. The retained earnings constitute a source of finance. The optimum dividend policy should strike a balance between current dividends and future growth which maximizes the price of the firm's shares.

2.

Stability of dividends Dividend stability refers to the payment of a certain minimum amount of dividend regularly. The stability of dividends can take any of the following three forms: a. b. c. constant dividend per share constant dividend payout ratio or constant dividend per share plus extra dividend

3.

Legal, contractual and internal constraints and restrictions Legal stipulations do not require a dividend declaration but they specify the conditions under which dividends must be paid. Such conditions pertain to capital impairment, net profits and insolvency. Important contractual restrictions may be accepted by the company regarding payment of dividends when the company obtains external funds.

4.

Owner's considerations The dividend policy is also likely to be affected by the owner's considerations of the tax status of the shareholders, their opportunities of investment and the dilution of ownership.

5.

Capital market considerations The extent to which the firm has access to the capital markets, also affects the dividend policy. In case the firm has easy access to the capital market, it can follow a liberal dividend policy. If the firm has only limited access to capital markets, it is likely to adopt a low dividend payout ratio.

6.

Inflation With rising prices due to inflation, the funds generated from depreciation may not be sufficient to replace obsolete equipments and machinery. So, they may have to rely upon retained earnings as a source of fund to replace those assets. Thus, inflation affects dividend payout ratio in the negative side. ---------------------------------------------------------------------------------------------------------------------------------------------

Credit Policy:

( Definition: )

The word, "policy", can be a broad and frightening term. While most companies have their own policies, procedures, and guidelines, it is unlikely that any two firms will define them in a similar manner. Furthermore, while many individuals appreciate the need for a workable set of regulations, "policy" carries some negative connotations of bureaucracy and inflexibility. The word is derived from the same root as politics and police, and the sentence, "It's not our policy," can infuriate customers. OR
Clear, written guidelines that set (1) the terms and conditions for supplying goods on credit, (2) customer qualification criteria, (3) procedure for making collections, and (3) steps to be taken in case of customer delinquency. Also called collection policy.