6.

Market Considerations The risk-return concept also applies to the firms dividend policy. A firm where the dividends fluctuate from period to period will be viewed as risky, and investors will require a high rate of return, which will increase the firms cost of capital. So, the firms dividend policy also depends on the markets probable response to certain types of policies. Shareholders are believed to value a fixed or increasing level of dividends as opposed to a fluctuating pattern of dividends. In other words, the market consideration is a kind of information content of the dividends. Its a kind of signal for the firm to decide its final policy. A stable and continuous dividend is a positive signal that conveys to the owners that the firm is in good in health. On the other side, if the firm skips in paying dividend due to any reason, the shareholders are likely to interpret this as a negative signal. 7. Taxation The firms earnings are taxable in many countries. This taxation is applied differently in different countries. One can group these different taxation practices as under: Single Taxation The firms earnings are taxed only once at the corporate level. Share holders whether they are individuals or other firms do not pay taxes on the dividend income. They are exempt from tax. However the shareholders both individuals and other firms are liable for capital gains tax. India currently follows this single taxation. Under this, the firms in India pay 35% tax on their earnings and they will have to pay additional tax at 12.5% on the after tax profits distributed as dividends to the shareholders. The experience shows that after the implementation of this single taxation, Indian firms have started sharing a sizeable portion of their earnings with their shareholders as dividends Double taxation Under this, the shareholders earnings are taxed two times: first the firms profit earnings are taxed as corporate tax and then the shareholders dividend earnings out of the after tax profits are taxed as dividend tax.

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