Question

‘Suruchi Textiles Ltd.’ is a reputed textile manufacturing company with stable earnings. It has been paying regular dividends for the last seven years, which has helped it to build a loyal investor base. It has a large number of its shareholders who depend on regular income from their investment and therefore expect at least a minimum dividend every year. To meet these expectations and maintain shareholders confidence, the company has followed a high dividend policy.

During the current year, the company planned further expansion, which required additional funds. However, since a major portion of its earnings had been distributed as dividends in earlier years, the company had retained limited funds. But, since ‘Suruchi Textiles Ltd.’ had a strong reputation in the capital market, it was able to raise the required capital from the capital market to finance its expansion plans.

Identify and explain four factors affecting the dividend decision discussed in the above case.

Hint:

Match each fact in the case to a factor: stable earnings, regular dividends for seven years, shareholders wanting minimum dividend, and ability to raise capital from the market.

Answer 1

Step 1: Understand the question:
The case describes Suruchi Textiles Ltd. and its dividend practice.
We must pick four factors that affect dividend decision from the case and explain each with the case words.

Step 2: Factor 1: Stability of earnings:
The case says the company has stable earnings.
A company with stable earnings can declare higher and regular dividends. A firm with unstable profits has to be careful.
So stable earnings support its dividend payout.

Step 3: Factor 2: Stability of dividends:
The case says it has paid regular dividends for the last seven years.
Companies like to keep dividends steady or rising from year to year.
This builds a loyal investor base, so the firm continues the policy.

Step 4: Factor 3: Preference of shareholders:
The case says many shareholders depend on regular income and expect at least a minimum dividend every year.
Directors give weight to what shareholders want when deciding the payout.
This is why the company followed a high dividend policy.

Step 5: Factor 4: Access to capital market:
The case says the company had a strong reputation in the capital market and could raise the needed capital there.
A company that can raise funds easily need not keep back much profit.
So it was able to pay high dividends and still finance expansion.

Final Answer:
The four factors are stability of earnings, stability of dividends, preference of shareholders and access to capital market.