The following detailed discussion will aim at providing valuable inputs in arriving at the right answer. DIVIDEND I.

What is dividend? A dividend is a bonus, an extra, a payment, a share or a surplus or periodical return on any original investments. Suppose we have invested in a company Rs.100,000 as a share holder and the company declares a return of say Rs.10,000 on this investment in a particular year, then the return is called the dividend on the investment made and the dividend pay out is 10%. II. How do we define dividends? Thus dividend is the distribution of value to shareholders, normally out of the profits made by the firm in a particular year. Of course, unlike interest payable on a deposit or a loan which is compulsory payment, dividend is not a compulsory yearly payment. Only if the company makes a profit decides to distribute such profits, declare dividends, the share holders will get a return. III. Factors which influence dividend decisions 1. Legal constraints Normally all countries prohibit companies from paying out as cash dividends any portion of the firms legal capital, which is measured by the par value of equity shares (common stock) Other countries define legal capital to include not only the par value of the equity shares (common stock), but also premium paid if any (any-paid in capital in excess of par). These capital impairment restrictions are generally established to provide a sufficient equity base to protect creditors claims. We shall examine an example to clarify the differing definitions of capital: Company XYZ Limiteds financial highlights as revealed from its latest balance sheet are as follows: Equity share at par 1,00,000

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