Question: What are the principal considerations of a board of directors in making

decisions involving dividend declarations? Discuss briefly.

Answer
The board of directors must consider both the legal and economic implications of a
dividend when determining whether one should be declared.
Step-by-Step Solution
Step 1: Meaning of Dividend
Whether paid in cash or in-kind, dividends are a payment made by an organization
to its shareholders. It is possible to receive dividends in cash, stocks, and other assets.
Step 3: In general, when considering the validity of a dividend declaration,
directors should examine the following factors:
1. The correct foundation for dividend distribution is normally retained earnings
unless they are legally bound in some way.

2. Additional paid-in capital may be utilized for dividends in some states, while
preferred stock payments may be limited.

3. Any retained earnings deficits and debits in paid-in capital accounts must be
repaired before any dividends are paid.

4. In some areas, dividends may not be enough to bring retained earnings below
the cost of treasury shares maintained.

Step 3: The board of directors should evaluate the following factors to ensure
that dividends are financially sound:
1. The availability (liquidity) of assets for distribution

2. Creditor agreements

3. The impacts of a dividend on investor perceptions (e.g., maintaining a

projected "payout ratio")

4. The dividend size in relation to the possibility of paying dividends in future bad
years. It's also worth considering whether or not existing facilities can be
expanded or replaced.