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Financial Management — Business Studies STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceBusiness StudiesFinancial Management6 Marks
Question
HCL Technologies is one of the leading information technology outsourcing services providers in India. The company provides business consultancy and outsourcing services to its clients. Over the past five years, the company has been paying dividends at high rate to its shareholders. However, this year, although the earnings of the company are high, its liquidity position is not so good. Moreover, the company plans to undertake new ventures in order to expand its business.
  1. State any three reasons because of which you think HCL Technologies has been paying dividends at high rate to its shareholders over the past five years.
  2. Comment upon the likely dividend policy of the company this year by stating any two reasons in support of your answer.
✓

Answer

  1. HCL Technologies has been paying dividends at high rate to its shareholders over the past five years because:
  • Earnings: The earnings of the company have been high. Since the dividends are paid out of current and past earnings, there is a direct relationship between the amount of earnings of the company and the rate at which it declares dividend.
  • Cash flow position: The cash flow position of the company must have been good as in order to pay high dividends, more cash is required.
  • Access to capital market: Because of its credit worthiness, the company enjoyed an easy access to capital market. Therefore, it did not feel the need to depend entirely on retained earnings to meet its financial needs. Hence, it declared higher dividends in past.
  1. The company is likely to follow a conservative dividend policy this year because:
  • The cash flow position of the company is not good and dividends are paid in cash.
  • The company may like to retain profits to finance its expansion projects. Retained profits do not involve any explicit cost and are considered to be the cheapest source of finance.

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