0
Whether a company can declare dividend out of capital profits?
Wiki User
∙ 15y ago
Yes, a private company can distribute dividends from capital profits in English law. The companies Act 2006 contains restrictions on dividend distributions (section 830 onwards) but does not differentiate between capital and revenue profits. As long as the capital profit is realised it is allowed.
Wiki User
∙ 15y ago
Add your answer:
Earn +20 pts
What happens when a company Declares Quarterly Dividend?
It means that the company would share its profit with its share holders once every 3 months of the year. The Dividend % is decided based on the profits made by the company during the current fiscal quarter. Let us say a company has a face value of Rs. 10/- and decides to declare a dividend of 25% it means that for every share you hold in that company you will get Rs. 2.5/- as dividend.
What does declare a dividend mean?
Declaring a dividend is a corporate action taken by the board of directors of a company. Usually this is done once or twice a year when the company's financial results are declared and the company has made handsome profits/revenues. Dividend is usually declared as a % of the face value of a share. A 100% dividend on a Rs. 1/- face value share represents a dividend of Rs. 1/- similarly a 100% dividend on a Rs. 10/- face value share represents a dividend of Rs. 10/- Ex: You hold 1000 shares of XYZ limited with a face value of Rs. 5/- the company has declared a 50% dividend. Then you would receive Rs. 2,500/- as dividend.
How do you declare dividends?
declared and paid a $900 dividend
Who can declare a dividend for a corporation?
The board of directors only.
Is it compulsory to pay dividends on common equity?
No it is not. Dividends are a means of sharing the profit of a company with the share holders of that company but it is not compulsory. Companies usually declare dividends when they have a good financial year and make solid profits. If the year went bad, the company may opt not to declare any dividend that year.
What is the accounting double entry when a company declare or pay dividend to its holding overseas company with 10 percent local withholding tax rate?
Let's say the dividend payable is $110. When the dividend is declared (eg the decision is made to pay a dividend but the dividend and tax won't be paid until, say, the first day of next month) then the entry is: Debit "Dividends Expense" (Expense Account) $110 Credit "Dividend Payable Parent Company" (Liability Account) $100 Credit "Dividend Tax Withheld" (Liability Account) $ 10 When the dividend and Tax is actually paid (eg it is now the first day of next month) the entry is: Debit "Dividend Payable Parent Company" (Liability Account) $100 Debit "Dividend Tax Withheld" (Liability Account) $ 10 Credit "Bank Account" (Asset Account) $110
What is interium dividend?
Interim Dividend: Companies can pay dividend at the end of financial year which is called final dividend but sometimes companies declare two dividends one in the middle of the financial years that dividend is called interim dividend and then one at the end of the financial year which is called final dividend.
How do you calculate retained earnings for balance sheet?
Retained Earning is the profit bring in the share capital. Example Company XYZ is running since last 3 years they have not declare any dividend since last two years so in the year 2008 the profit of Rs. 100000 bring in share capital as a retained earning. In the year 2009 again profit of Rs. 150000 bring in share capital as retained earning so (100000 of year 2008 +150000 of year 2009 =250000 in the year 2009). now company declared dividend in the of Rs. 100000 in the year 2010 and generate profit of Rs. 200000 so in the year 2010 the retained earning is ( 100000 of 2008 + 150000 of 2009+200000 of 2010 - 100000 dividend= 350000)
Why does a company issue bonus shares?
Sometimes a company might not have made any profit during the year but would not like to leave the shareholders hanging.Therefore it might liquidate certain reserves which under statute cannot be used to declare a dividend but can be used to declare a bonus issue.Bonus Issues are also very cheap for the company and do not interfere with the debt-equity structure of the enterprise.
What dividend per share should the company declare If Collins Inc latest net income was 1 million and it had 200 000 shares outstanding and the company wants to pay out 40 percent of its income?
net income = $1,000,000 x payout ratio = 40% total payout = $400,000 divided by 200,000 shares outstanding dividend per share = $2.00
Factor affecting dividend policy?
Dividend DecisionDividendMeaning: Dividend is that part of the profits of a company which is distributed amongst its shareholders.Definition: According to ICAI, "Dividend is a distribution to shareholders out of profits or reserves available for this purpose."Nature of Dividend DecisionThe dividend decision of the firm is crucial for the finance manager because it determines:1. the amount of profit to be distributed among the shareholders, and2. the amount of profit to be retained in the firm.There is a reciprocal relationship between cash dividends and retained earnings.While taking the dividend decision the management take into account the effect of the decision on the maximization of shareholders' wealth.Maximizing the market value of shares is the objective.Dividend pay out or retention is guided by this objective.Dividend PolicyFactors Affecting Dividend Policy:1. External Factors2. Internal FactorsExternal Factors Affecting Dividend Policy1. General State of Economy:In case of uncertain economic and business conditions, the management may like to retain whole or large part of earnings to build up reserves to absorb future shocks.In the period of depression the management may also retain a large part of its earnings to preserve the firm's liquidity position.In periods of prosperity the management may not be liberal in dividend payments because of availability of larger profitable investment opportunities.In periods of inflation, the management may retain large portion of earnings to finance replacement of obsolete machines.2. State of Capital Market:Favourable Market: liberal dividend policy.Unfavourable market: Conservative dividend policy.3. Legal Restrictions:Companies Act has laid down various restrictions regarding the declaration of dividend:Dividends can only be paid out of:** Current or past profits of the company. Money provided by the State/ Central Government in pursuance of the guarantee given by the Government.Payment of dividend out of capital is illegal.A company cannot declare dividends unless:** It has provided for present as well as all arrears of depreciation. Certain percentage of net profits has been transferred to the reserve of the company.Past accumulated profits can be used for declaration of dividends only as per the rules framed by the Central Government4. Contractual Restrictions:Lenders sometimes may put restrictions on the dividend payments to protect their interests (especially when the firm is experiencing liquidity problems)Example:A loan agreement that the firm shall not declare any dividend so long as the liquidity ratio is less than 1:1.The firm will not pay dividend more than 20% so long as it does not clear the loan.Internal Factors affecting dividend decisions1. Desire of the Shareholders:Though the directors decide the rate of dividend, it is always at the interest of the shareholders.Shareholders expect two types of returns:[i] Capital Gains: i.e., an increase in the market value of shares.[ii] Dividends: regular return on their investment.Cautious investors look for dividends because,[i] It reduces uncertainty (capital gains are uncertain).[ii] Indication of financial strength of the company.[iii] Need for income: Some invest in shares so as to get regular income to meet their living expenses.2. Financial Needs of the Company:If the company has profitable projects and it is costly to raise funds, it may decide to retain the earnings.3. Nature of earnings:A company which has stable earnings can afford to have an higher divided payout ratio4. Desire to retain the control of management:Additional public issue of share will dilute the control of management.5. Liquidity position:Payment of dividend results in cash outflow. A company may have adequate earning but it may not have sufficient funds to pay dividendsStability of DividendsThe term stability of dividends means consistency in the payment of dividends. It refers to regular payment of a certain minimum amount as dividend year after year.Even if the company's earnings fluctuate from year to year, its dividend should not. This is because the shareholders generally value stable dividends more than fluctuating ones.Stable dividend can be in the form of:1. Constant dividend per share2. Constant percentage3. Stable rupee dividend plus extra dividendSignificance of Stability of Dividend1. Desire for current income2. Sign of financial stability of the company3. Requirement of institutional investors4. Investors confidence in the companyDanger of Stable Dividend PolicyStable dividend policy may sometimes prove dangerous. Once a stable dividend policy is adopted by a company, any adverse change in it may result in serious damage regarding the financial standing of the company in the mind of the investors.Forms of Dividend1. Cash Dividend:The normal practice is to pay dividends in cash.The payment of dividends in cash results in cash outflow from the firm. Therefore the firm should have adequate cash resources at its disposal before declaring cash dividend.2. Stock Dividend:The company issues additional shares to the existing shareholders in proportion to their holdings of equity share capital of the company.Stock dividend is popularly termed as 'issue of bonus shares.'This is next to cash dividend in respect of its popularity.3. Bond Dividend:In case the company does not have sufficient funds to pay dividends in cash it may issue bonds for the amount due to shareholders.The main purpose of bond dividend is postponement of payment of immediate dividend in cash. The bond holders get regular interest on their bonds besides payment of the bond money on the due date.[Bond dividend is not popular in India]4. Property Dividend:This is a case when the company pays dividend in the form of assets other than cash. This may be in the form of certain assets which are not required by the company or in the form of company's products.[This type of dividend is not popular in India]Bonus SharesWhen the additional shares are allotted to the existing shareholders without receiving any additional payment from them, is known as issue of bonus shares.Bonus shares are allotted by capitalizing the reserves and surplus.Issue of bonus shares results in the conversion of the company's profits into share capital. Therefore it is termed as capitalization of company's profits.Since such shares are issued to the equity shareholders in proportion to their holdings of equity share capital of the company, a shareholder continues to retain his/ her proportionate ownership of the company.Issue of bonus shares does not affect the total capital structure of the company. It is simply a capitalization of that portion of shareholders' equity which is represented by reserves and surpluses.It also does not affect the total earnings of the shareholders
The shareholders at an annual general meeting passed a resolutionfor the payment of dividend ata rate higher than recommended by the Board of Directors Examine the validity of the resolution Explain?
Articles of companies usually contain provisions with regards to declaration of dividend on the pattern of regulations 85 to 94 of Table A of the Companies Act, 1956. Under the regulation 85, the power to declare a dividend vests with the general meeting, but it has no power to declare a dividend exceeding the amount recommended by the Board of Directors.
