Stephen John

Capital budgeting is a required managerial tool.  One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return.  Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives.  To do this, a sound procedure to evaluate, compare, and select projects is needed.  This procedure is called capital budgeting.

Dividend policy of the firm is yet another crucial area of financial management. The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained in the firm. Retained earnings are the most significant internal sources of financing the growth of the firm. On the other hand, dividends may be considered desirable from shareholders’ point of view as they tend to increase their current return. In theory, the objective of a dividend policy should be to maximise a shareholder’s return so that the value of his investment is maximised. Shareholders’ return consists of two components: dividends and capital gains. Dividend policy has a direct influence on these two components of return.
What does dividend policy imply? Paying dividends involves outflow of cash. The cash available for the payment of dividends is affected by the firm’s investment and financing decisions. A decision to incur capital expenditure implies that less cash will be available for the payment of dividends.