The dividend is calculated mainly on the basis of the company's unappropriated
profit and its business prospects for the coming year. If there are no NPV positive opportunities, i.e. where
returns exceed the hurdle rate, then management must return excess cash to
investors. These
free cash flows comprise cash remaining after all business expenses have been met.
This is the general case, however there are exceptions. For example, investors in a "
Growth stock", expect that the company will, almost by definition, retain earnings so as to fund growth internally. In other cases, even though an opportunity is currently NPV negative, management may consider “investment flexibility” / potential payoffs and decide to retain cash flows; see
above and
Real options.
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akhil
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The dividend decision
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