Principles of Managerial Finance, 15th Edition

14.4 Factors Affecting Dividend Policy

1. LG3

The dividend policy represents a plan of action to be followed whenever the firm makes a dividend decision. Firms develop policies consistent with their goals. Before we review some popular types of dividend policies, we discuss five factors that firms consider in establishing a dividend policy. They are legal constraints, contractual constraints, the firm’s growth prospects, owner considerations, and market considerations.

Legal Constraints

Most states prohibit corporations from paying out as cash dividends any portion of the firm’s “legal capital,” which is typically measured by the par value of common stock. Other states define legal capital to include not only the par value of the common stock ...