Page 4 - Lesson Note 3

Thus, the possible impact of dividend policy on the equity share

price is one of the important factors considered by the
management while taking a decision about it.

(i) Access to Capital Market:

Large and reputed companies generally have easy access to the
capital market and, therefore, may depend less on retained

earnings to finance their growth. These companies tend to pay
higher dividends than the smaller companies which have

relatively low access to the market.

(j) Legal Constraints:
Certain provisions of the Companies Act place restrictions on pay-

outs as dividend. Such provisions must be adhered to while
declaring the dividend.

(k) Contractual Constraints:

While granting loans to a company, sometimes the lender may
impose certain restrictions on the payment of dividends in future.
The companies are required to ensure that the dividend does not

violate the terms of the loan agreement in this regard.

FINANCIAL PLANNING

Financial planning is essentially the preparation of a financial blueprint
of an organization’s future operations. The objective of financial

planning is to ensure that enough funds are available at right time.
If adequate funds are not available the firm will not be able to honour
its commitments and carry out its plans. On the other hand, if excess

funds are available, it will unnecessarily add to the cost and may
encourage wasteful expenditure.