Question

Computer Tech Ltd., 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.

In context of the above case:

1. Give any three reasons because of which you think Computer Tech Ltd. 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 years by stating any two reasons in support of your answer.

Answer 1

1. Computer Tech Ltd. has been paying dividends at high rate to its shareholders over the past five years because of the following reasons:

•  Earnings: Computer Tech Ltd. likely paid high dividends due to consistently strong earnings, showing financial health and attracting investors.
• Cash flow position: Strong cash flow from operations allowed the company to sustain dividend payments without compromising liquidity.
• Access to capital market: The company's ability to raise funds through debt or equity issuance ensured continued dividend payouts, even during cash flow shortages, and attracted investors

2. This year the company is likely to follow a conservative dividend policy because of the following reasons:

• The cash flow position of the company is not god 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.