Dividend is a distribution to shareholders out of profits or reserves available for this purpose. The divided policy refers to the policy concerning quantum of profits to be distributed as dividend. Dividends are distributed to shareholders only when the board of directors declare them. The courts will not interfere with the power of the directors to decide on the dividend payouts. If it can be shown that such standards are not upheld by the directors, they may be found personally liable for the result /damage their decisions may have wrought on shareholders. The relevance theory suggests that The firm does the entire financing through retained earnings. It does not use external sources of funds such as debt or new equity capital. This means that the investment decision is dependent on the dividend decision.
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