Dividend should be declared based on future needs of the organisation. If the company has positive NPV projects available do not declare dividend, else do.
Alternatives to distribution of dividend:
Buy back of shares: This comes out with advantages such as
a. When the growth potential is limited they use unused cash to buy back shares.
b. Tax gains – Capital Gains is lower rate
c. Market perception: By buying its shares at a price higher than the prevailing market price company signals that its share valuation should be higher. etc.
d. Investors can choose: Everyone has to take dividends. Only those investors wanting return of capital will participate in buy back
WRONG ANSWERS
Stock split: A stock split does not change the wealth of the shareholder, it reduces the market price per share. There is no cash flow
Bonus shares: Essentially same as stock split
